You’ve probably heard about bridging loans before, but you might not be sure what they are or how they work. A bridging loan is a short-term loan that allows you to bridge a financial gap until you get your house paid off. Think of it as a way to get your foot in the housing market without paying it upfront can offer a bank a small amount of collateral, and you could get a mortgage.
But, in Australia, you can only get a bridging loan if you have a stable source of income. Otherwise, you’ll need to look at other options.
A bridging loan calculator helps you estimate how much the loan will cost. It can be challenging to obtain accurate information on what a bridging loan will cost you, especially if it’s secured against your home, as lenders may not consider it at risk. Here’s everything you need to know about bridging loans in Australia.
How do I qualify?
You must meet the following criteria to be eligible for a bridge loan:
Equity
Bridging lenders in Australia will typically require applicants to have at least 20% equity in their current property before being approved for a bridging loan. This requirement is simple, as it means that if something goes wrong during the sale process, and you have to sell your house at a loss, you still own enough equity to cover any outstanding debt on your home loan.
Standard service ability requirements
Every lender will also have their own set of service ability requirements, which they use to determine whether a particular applicant can repay their bridging loan and other debts in full. You must also meet standard serviceability requirements, which are different for each lender. Most lenders will also require you to provide a bridge term of no more than six months for buying an existing property and 12 months for purchasing a new property. You must also have a total sale on your current property.
the unconditional contract of sale
The main requirement for a bridging loan is that your existing property is under contract to be sold and that you have an unconditional contract of sale. This can be either a sale by private treaty or an auction sale. If you are buying a new property, the same rule applies, but it must be a total sale on the new property.
Bridge term of no more than 12 months for buying a new property.
The bridge term should generally be no more than six months for buying an existing property; however, they can provide up to 12 months of bridge term funding. This is where the new purchase is a vacant block of land or off-the-plan purchase. The bridging loans offered can only be used to buy residential property, including houses, units, and townhouses.
Bridging finance is typically secured against one or more properties. The loan is generally paid out before the sale settles, funded by the proceeds on settlement of the sold property.
How much can I borrow?
Lenders typically want to see a large amount of liquidity in your business.
Borrow up to 80% of the peak debt
Borrow up to 80% of your peak debt maximum amount you can borrow varies from lender to lender, but typically ranges from 50% to 80% of the value of your assets, subject to security and affordability.
Interest payment and fire sale buffer may be added
The amount that you can borrow for a bridging loan is based on the equity in your property; however, interest payments and a fire sale buffer may also be added to this amount. Bridging loans are typically short-term loans, with various terms available for varying lengths of time.
Bridging loans explained: How does it work?
Bridging loans typically have terms of up to 12 months but can go longer if required. They are usually provided at up to 70% of the property’s value being purchased. If the vendor requires a 10% deposit, you would need a bridging loan for 80%.
You are required to pay interest every month, and there will be fees involved. Before going ahead, check out all the costs associated with this type of loan.
A bridging loan can be secured against your existing property or future assets, such as another property you plan on buying. To receive this type of loan, you generally need equity in your current property or be able to pay interest-only repayments in the short term.
Why would you ever need a bridging loan?
A bridging loan is a short-term financial instrument that serves as an immediate and temporary solution to the borrower’s economic problems. It can be used to bridge the gap between two different property transactions.
Property developers often use bridging loans because they can get quick access to funds to start on a project straight away. Homebuyers also use it when they can’t wait for their current house to sell before buying a second property.
If you are working in real estate, you will be aware of the benefits of buying a run-down property, doing it up, and then selling it for a profit. This can be a lucrative business as long as you know what you are doing. However, when buying or selling a house or apartment, it can take time for the sale to go through and the money to come in. If there is a gap between the purchase and completion of the sale, bridging loans could provide you with the finance needed to complete the sale.
If you have found your dream home at an auction but don’t have the total amount of cash available, bridging loans can provide you with the money needed to pay for your new home. You will then have 6-12 months to organize your finances to pay off the loan from your resources or other sources of credit such as a mortgage.
Do you need a deposit for a bridging loan?
Bridging loans are not like standard bank home loans in this way. They don’t require any kind of deposit from borrowers. However, if you want to get the best rates on your bridging loan, it’s best if you have up to 20% equity in your existing property that you’ll be selling.
The deposit requirement varies from lender to lender and depends on several factors such as credit history, debt-to-income ratio, and current rates. However, all lenders will want some form of security to be able to make a loan with them.
Using a bridging loan calculator is a good start, but do you want to learn what bridging loan deals are available to you? Contact us today so that we can understand your situation better and provide you with a free, no obligation quote on your loan.
