Bridging Loans
Bridging loan functions as a short-term loan that funds the purchase of a new property while you're in the process of selling your current one.
It can also provide finance for building a new home while you continue to reside in your current one.
Typically, you'll have six months to sell the existing property or twelve months if a new property is under construction.
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1. Interest Capitalisation:
If your ability to handle repayments on both properties is limited, a bridging loan with interest capitalization might offer a viable solution, providing some financial flexibility as you await the sale of your current property.
2. Maximum loan on the new property
A bridging loan can enable you to borrow the entire purchase price of your new property, along with its related costs, up to 100%. This is especially handy if you've bought a property that exceeds your current borrowing limit but will become affordable once you've sold your existing property.
When you opt for a bridging loan, the lender typically assumes the mortgage on your existing property while also financing the purchase of the new property.
The total borrowed amount, known as the Peak Debt, encompasses the balance of the loan on your current home, the contract purchase price of the new home, and any associated costs like stamp duty, legal fees, and lenders fees.
Minimum repayments on a bridging loan are usually based on interest-only calculations, with the interest often being capitalised until the sale of the existing home – meaning it's accrued and added to the Peak Debt.
Upon selling your initial property, the net proceeds of the sale (sale price minus any selling costs such as agent fees) are utilised to diminish the Peak Debt. The remaining debt then becomes the End Debt, which is repaid using a standard mortgage product thereafter.
If the loan balance on your current property is $300,000 and you need $600,000 for the new property, you could potentially borrow up to $900,000, constituting your Peak Debt.
You currently hold a short-term debt of $900,000, for which interest is due, as you await the sale of your current property.
If you choose to add the interest charges to your loan, your debt will keep growing until you begin repaying it or sell your current property.
If you've been paying the interest and your Peak Debt stays at $900,000 in this example.
If you get $600,000 from selling your current property and use it all to pay off your Peak Debt, you'll have an end debt of $300,000 (which is $900,000 minus $600,000).
From here onwards, you're simply on a regular mortgage plan with consistent repayments.
When you opt to capitalize the interest on a bridging loan, you're freed from making complete loan repayments throughout the bridging period.
Consequently, your Peak Debt will rise each month as the interest gets added to your loan. The monthly interest will be based on your Peak Debt, including the accrued interest.
It's advisable to make some repayments whenever feasible to prevent the total loan amount from escalating and to minimize the additional interest being incurred.