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New Home

A Comprehensive Guide to Bridging Loans

In the dynamic world of real estate, timing is often critical. If you're looking to buy a new home, there's a strong chance are you will need to sell your current home to make it work. Most think the only option is to sell their home first, but there's a financial tool you can use which will allow you to buy the new home first.

Understanding Bridging Loans

Bridging loans are short-term loans designed to help you buy a new home before you sell your current one. Essentially, bridging loans "bridge" the gap in debt between the purchase of a new property and the sale of an existing one.

How Bridging Loans Work

  1. Application Process: Arranging a strong application upfront is crucial to maximise your chance of approval. Using a mortgage broker can help here. The application process involves providing details about the current property, the intended purchase, financial information, and repayment plans. Lenders assess your application based on the sale price of your current home, the value of the new property and your finances.

  2. Valuation: A bank valuation of your current home and the property being purchased is completed to determine their market values. The valuation plays a crucial role in determining the loan amount that can be extended to the borrower.

  3. Loan Approval: Upon approval of the application and valuation, the lender disburses the bridging loan funds to the borrower. These funds are to cover the purchase price, and associated costs of the new property, such as legal fees and stamp duty

  4. Initial Deposit: Once approved, you'll need to pay a 10% deposit to secure the purchase. If you can't pay this using cash, you can use another financial tool called a 'Deposit Bond'. Your mortgage broker can help you arrange one.

  5. Interest Payments: During the bridging period, most lenders add the interest of the loan onto the home loan. This means you don't need to make repayments, it will be repaid once you sell your current home. The interest rates for bridging loans are often higher than those for traditional mortgages, reflecting the short-term nature and higher risk associated with these loans.

  6. Sale of Existing Property: Once the existing property is sold, the proceeds from the sale are used to repay the bridging loan in full, including any accrued interest and fees. Any remaining funds from the sale proceeds are then returned to you.

  7. Conversion or Refinancing: In some cases, borrowers may choose to convert the bridging loan into a long-term mortgage on the new property or refinance with a different lender to secure more favourable terms. This allows borrowers to transition smoothly from short-term financing to a permanent financing solution.

Showing a Property

Benefits of Bridging Loans

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Bridging loans offer several benefits to borrowers, making them a valuable financial instrument in certain real estate transactions. Some of the key benefits include:

  1. Flexibility: Bridging loans provide borrowers with flexibility in timing their property transactions. They allow buyers to proceed with the purchase of a new property without having to wait for the sale of their existing property to be finalized.

  2. Speed: Bridging loans can be processed quickly, enabling borrowers to capitalize on time-sensitive opportunities in the property market. This speed is especially advantageous in competitive real estate environments where delays can result in missed opportunities.

  3. Access to Equity: Bridging loans allow borrowers to leverage the equity in their existing property to finance the purchase of a new property. This can be particularly useful for homeowners who have significant equity tied up in their properties but may not have sufficient cash on hand for a new purchase.

  4. Seamless Transition: By providing interim financing, bridging loans facilitate a seamless transition between property transactions. Borrowers can move into their new home or investment property without experiencing financial strain or disruption.

  5. Tailored Solutions: Lenders offer customized bridging loan solutions to meet the unique needs and circumstances of individual borrowers. Whether it's a short-term bridge for a residential property purchase or a larger-scale commercial transaction, bridging loans can be tailored to suit specific requirements.

Considerations and Risks

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While bridging loans offer significant benefits, they also come with certain considerations and risks that borrowers should be aware of:

  1. Cost: Bridging loans typically carry higher interest rates and fees compared to traditional mortgages. Borrowers should carefully consider the overall cost of the loan and ensure that they have a viable exit strategy in place to repay the loan within the agreed-upon timeframe.

  2. Market Conditions: The success of a bridging loan transaction may be influenced by market conditions, such as fluctuations in property prices or changes in interest rates. Borrowers should conduct thorough due diligence and assess market conditions before proceeding with a bridging loan.

  3. Exit Strategy: Having a clear exit strategy is essential when taking out a bridging loan. Borrowers should have a plan in place to repay the loan, whether it involves the sale of their existing property, securing permanent financing, or other means of repayment.

  4. Financial Stability: Borrowers should ensure they have the financial stability and resources to meet their repayment obligations throughout the bridging period. Failure to make timely payments could result in additional fees, penalties, and potential consequences to your credit file.

Image by Phil

The pros and cons of selling vs bridging

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Selling Before Buying:

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Pros:

  1. Exact Budget: Knowing the exact amount for your next purchase.

  2. No Rush: No pressure to buy until satisfied with the sale price.

  3. Avoid Bridging Loans: No need for bridging loans or managing multiple loans simultaneously.

Cons:

  1. Uncertain Housing: Risk of not finding a suitable house immediately.

  2. Additional Expenses: Potential rental costs and the hassle of moving twice.

  3. Market Fluctuations: Possibility of prices rising post-sale, affecting affordability or availability.

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Buying Before Selling:

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Pros:

  1. Stability: Avoiding rental costs and multiple moves.

  2. Market Flexibility: No urgency to find a new house quickly.

  3. Market Advantage: Opportunity to capitalize on a rising market and potentially gain more from the sale.

Cons:

  1. Bridging Loan Needed: May require a bridging loan for the new property.

  2. Higher Interest: Bridging loan interest rates are higher than standard loans.

  3. Dual Mortgage Stress: Managing repayment for two mortgages simultaneously.

  4. Forced Sale: Pressure to sell the original property quickly to meet loan obligations.

  5. Financial Shortfall: Potential need for additional funds if the original property doesn't sell as expected.

  6. Higher Offers: Need for potentially higher offers on conditional purchases to secure a property.

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Conclusion

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Bridging loans serve as a valuable financial tool for individuals and businesses navigating complex real estate transactions. By providing temporary funding to bridge the gap between property purchases and sales, bridging loans enable borrowers to seize opportunities, facilitate seamless transitions, and achieve their real estate goals with confidence. However, it's essential for borrowers to carefully consider the costs, risks, and implications associated with bridging loans and to work closely with reputable lenders and financial advisors to ensure a successful outcome.

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Having the right mortgage professional is crucial to help guide you through the bridging loan process.

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​MortgageHub is a family operated award winning mortgage brokerage based in Sydney's Northern Beaches, specialising in coaching everyday Australians achieve their financial dreams.

Accredited with over 40 banks and lenders, insurance providers and property researchers, MortgageHub offers a wide range of options and solutions. We negotiate between all the various banks on your behalf to obtain tailoring a loan solution to benefit your lifestyle and goals.

We'll manage the application process and liaise with real estate agents, banks, solicitors providing you with a stress free service. We offer a helping hand through the entire process so you never feel

Meet Aron Cardona, your local Northern Beaches Mortgage Broker

I'm a Mortgage Broker and Northern Beaches local with a passion to help everyday Australians navigate through the complexity of a mortgage to buy property.

I'm a proud father, loving husband and possessed fisherman. If I'm not with hanging with the family or fishing, I'm tucked away in the office working hard for you.

I specialise in tailoring home loan solutions fitting your needs and goals, drawing on my 14 years lending experience, as well as my own personal journey as a first-time buyer, upgrader, investor, and business owner.

I'm accredited with over 40 lenders, being a premium broker with many. I specialise in bridging loans and have had many application approved during my lending career. I'm also partnered with other local business to help support your financial journey and can assist in arranging a deposit bond which can be crucial during the bridging process.

I assists clients across Australia, with a focus on the Northern Beaches suburbs of Dee Why, Frenchs Forest, Cromer, Collaroy, Narrabeen, Wheeler Heights, Allambie Heights, Beacon Hill, and Manly.

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