What is a Bridging Loan (Relocation Loan)
“It provides the ability for customers to move on a property when they want to, without them having to wait to sell their existing home.”
In a perfect world, we would all be able to precisely match up the dates that we sell our existing home and purchase a new one. But in the real world, amid price fluctuations, differing auction clearance rates and general market uncertainty, many of us find our new dream home before we dispose of our existing one.
Bridging finance is not a new concept. As the name implies, it is a loan that serves as a bridge, to enable the purchase of a new property before the existing one is sold.
Bridging finance may not be for everyone – it pays to have built up at least 50% of your existing home’s value in equity before you attempt a bridging loan. Otherwise, you may end up paying a prohibitive amount of interest.
Various lenders use different models to calculate the value of a bridging loan, these calculations will need to allow for interest capitalising to the loan and also a valuation range that ensures you are willing to “meet the market” if the property has not been sold within the term of the bridging facility.
After these variables are allowed for, a bridging loan is no different to any other loan with respect to fees and charges. A bridging loan is just like a normal loan with interest-only repayments until the property is sold and the principal can be repaid in full,” he says.
How does it work?
Bridging loans tide you over between the purchase of your new home and the sale of your existing one. The size of your commitment is calculated by adding the value of your new home to your outstanding mortgage (existing home) then subtracting the likely sale price of your existing home. What’s left is referred to as your “ongoing balance,” and represents the principal of your bridging loan.
Bridging loans are interest-only, so during the bridging period of say, six months, interest will be compounded monthly on your ongoing balance at the standard variable rate. The interest bill will then be added to the ongoing balance when you sell your house, and this amount becomes the mortgage on the new property.
Don’t forget that you are still essentially carrying two mortgages, and during the bridging period you are not paying anything off. The longer you take to sell your existing home, the higher your interest bill, and hence your new mortgage, will be.
What are the risks?
Firstly, do your sums and chat to your broker, to make sure you can afford a bridging arrangement.
As with all residential property transactions, its important not to let your emotions get in the way. Don’t think with your heart, and create an idealised figure in your head that you think your property is worth. You must be prepared to meet the market.
Bridging loans are still subject to the usual array of mortgage-related costs.. The application fee for the bridging loan is generally around $600, which includes a valuation of one of the properties. The valuation of the other property will cost between approximately 200-$250.
You will also be up for a mortgage registration title transfer fees of around $400, and stamp duty on the new home, which differs from State to State.
If structured correctly, with realistic timeframes and price estimates, bridging finance can ease the pressure of matching up settlement dates, and give you time to sell your existing property whilst securing your new one. It’s not without its risks, and requires some careful research, but if you do your sums right, you’ll be out of your old home and into your new one with minimal hassle.
To compare home loans for Lenders offering a bridging facility that suits your needs, call Customers First Mortgages & Insurance for a no obligation consultation.