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Anyone who has any experience in the mortgage market would agree it might take up to several weeks to get a home loan. Then, how does one service an immediate need of cash when buying a new property and the existing one is not yet sold? While a traditional mortgage may be an average choice, it can take lenders a fair amount of time to process the loan and till that time your favoured property might no longer be available for sale.

Fortunately, there are bridging loans to rescue. Most commonly, bridging loans are used to finance a new property while the existing one is not sold yet. These loans take care of the funding during this period of transition when buyers may find themselves in a monetary fix. However, one must keep in mind that bridging loans are for short duration and only meant to bridge the funding requirement between your property settlement dates.

How-Bridging-loan-works

What is a bridging loan?

A bridging loan allows you to buy a new property while you are still looking for buyers for the existing one. If you plan to use the sale proceeds from one home to buy another and are still looking for a buyer, bridging finance can help you fund the new property for a short term in between.

How do bridging loans work?

Technically, bridging loans are not much different from traditional loans, except that they are for short duration and interest-only.

The amount of money you can borrow is calculated by adding the market value of your new property to the outstanding mortgage on your existing home; likely the sale price of your existing property is then subtracted from this amount to get the ongoing balance or the end debt which is the principal amount of your bridging loan.

This means that you must have sizeable equity (at least 50%) in your existing home before you apply for a bridging loan.

How are the repayments calculated?

During the term of the bridging loan, the lender takes security on both the properties against one peak debt (outstanding mortgage on existing home + ongoing balance). While you continue making your regular repayments (calculate using our home loan calculator) on the existing mortgage, lenders will calculate the interest on the peak debt during the bridging term, which is then added to your new loan once the existing property has been sold.

So apart from providing finance for your short-term needs, there is also the advantage of servicing your existing loan during that period as well. However, do not lose sight of the fact that you still have two loans to service and it makes sense to make some interest repayments during that term to reduce the overall peak debt.

The benefits of bridging loan:

1. Purchase a property without having sold your existing one.

2.  Interest only structure makes it easier to manage repayments between the settlement dates.

3. The associated costs and bridging loan rates are now comparable to traditional home loan rates, meaning you don’t have to shell out extra.

4. Save the hassle and cost of shifting twice and renting the house.

5. In case you sell the property for more than the anticipated price, use the extra amount to reduce the size of your mortgage at no extra cost.

The associated risks:

1. One of the biggest risks is that your current home may not sell in that period you signed up for. Most lenders will charge higher interest rates during that extended period.

2. Another potential drawback is the fact that your property may sell for lesser price than what you anticipated. To avoid this, get a professional valuation done rather than guessing your property’s worth, leading to the additional cost of getting two professional valuations done.

3. All lenders do not provide bridging loans. In case there’s a need to switch lenders, termination fee and exit costs will also need to be paid.

4. At least 20% of the peak debt saved over minimum 3 months is required as home loan deposit for your bridging loan.

When do I need a bridging loan?

1. Buying and selling the property at the same time – The world being less than ideal, there can be a gap between the sale of your existing property and the purchase of a new one. Bridging loans make good your financial requirement during this period if you are looking for sale proceeds from the existing property to pay for the new one.

2. Property development – Traditionally, property developers may have to wait for weeks before they get the requisite finance to start the planned development work. This means holding the property much longer than necessary before putting it up for sale. With a bridging loan, get access to finance as quickly as you need to fast track the development of the property for a quick sale.

3. Renovating uninhabitable properties – It is possible for you  to see the immense potential in a rundown property which you’d like to renovate, but convincing lenders of your logic is a tough cookie to crack. Instead, opt for a no questions asked bridging loan to get the property in shape for a profitable sale.

Bridging loans are great for borrowers looking for flexible short-term financing. These loans can be secured over any kind of property and take only a few hours to few days to be finalized. However, it is always best to consult an expert to understand your options better. To know more, talk to an expert broker for a quick resolution to your queries online, absolutely free of cost.

Whether you are looking to finance your first home, or planning to invest in the property or refinance your existing loan, compare home loan deals on HashChing to get the lowest home loan rates in the market.

By Vidhu Bajaj

 

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