In Australia, banks charge fixed and variable interest rates for loans. These fixed interest rates help you understand the cost of borrowing and whether a bridging loan rate is affordable.
Depending on your situation, you may qualify for different loan rates. For example, if you have a stable source of income and an excellent credit history, you may be eligible for a loan at a lower fixed rate.
On the other hand, if you don’t have much of a track record in repaying loans, you may be offered a loan at a higher variable rate. It’s essential to understand the different loan rates and their impact on your monthly repayments. It may also help you compare the various loan offers and make the right financial decision.
Here are the basic terms of a loan, the different loan rates, and the factors influencing your loan rate.
How do bridging loan rates work?
Bridge loans are based on your current mortgage and the purchase price of your new property. The term “peak debt” refers to the highest point in your debt history. With a $200,000 mortgage and the purchase of a new $400,000 home, your peak debt would be $600,000 if you were to take out a second mortgage.
To arrive at your current balance, your lender will deduct the expected sale price of your existing home from this figure. This buffer is usually included to account for the possibility of a lower sale price. Your bridging loan will have an amount similar to this.
The two main types of bridging loans are Closed and Open Bridge loans.
Open Bridge Loans
These are typically used by people who need to raise cash quickly and can’t wait for their property sale. They will use the funds from their new home purchase as an interim source of finance until their existing home is sold. They are secured against both the new and old properties, so it’s unlikely that you’ll be able to obtain this kind of bridging loan if you don’t already have a buyer for your existing home.
Open bridging loans can be used for what purpose?
Open bridging loans are used when contracts have not yet been exchanged on the sale of your current property or when settlement is expected to be delayed.
Closed Bridge Loans
These are usually used by people who know precisely when they can sell their current property but just need short-term finance to cover the gap between exchange and completion of contracts on their new home. This type of bridging loan is secured against either the existing property or the new one, depending on which one has a definitive sale date.
How can I secure a bridging loan that is already closed?
A 20% deposit is often required to close a bridging loan. In addition, you must include any relevant details regarding the properties you are purchasing and those you are attempting to sell.
These loans typically have application and monthly fees that add to your costs, so factor them in.
Factors that affect your loan interest rates
Many factors will influence your interest rate on a bridge loan in Australia, namely:
Size of deposit/equity
The more equity you have, the lower the interest rate will be because it lowers the risks for the lender. This is because a lender has less risk if you can pay off your loan. A larger deposit (and thus equity) means that you can potentially sell the property for more than what you owe and therefore pay off your loan in full.
If you have a good credit history, then it means that you have handled debt well in the past. This will make lenders more confident that you can take this debt. If you don’t have an established credit history or are unsure how it looks, it’s best to check before going for finance. If your credit score isn’t great, some things can be done, like paying off debts or meeting commitments on time for three months before applying for the loan.
As noted above, lenders bear the more significant risk when lending money to borrowers with no security or those whose security is inadequate for the value of their loan. Therefore, if you don’t have a house to use as security for your bridging finance or if its value doesn’t fully cover your borrowing needs, you’ll likely pay more interest rates than someone with good security.
Term of the loan
Bridging loans can be taken out for long or short terms. Generally speaking, short-term loans will result in higher rates than longer-term loans because they are riskier. This is because there are fewer opportunities to sell the property within a short period, which could mean that you won’t be able to repay your loan and could default. Some lenders will offer different rates depending on how long the bridging loan is taken out.
Location of property
A property located in a densely populated area will be easier to sell and attract buyers more quickly. As a result, lenders may offer better interest rates. Some lenders may find investing in a rural property less attractive due to the lack of infrastructure and low population density. If possible, invest in a property near employment hubs, infrastructure, and amenities such as schools and hospitals.
Type of construction
The quality and type of construction can also play a role in determining your bridge loan rates. Older properties are risky because they have higher chances of facing maintenance issues which the lender must factor in before offering attractive terms on their loans. On the other hand, new constructions are more attractive to investors because they are less likely to face maintenance issues.
Requirements for a bridging loan
Unlike other house loans, bridging loans have a few conditions that must be met. Depending on which lender or product you select, some of these concerns may apply:
You may have to put down a percentage of your income to get a loan, such as a 25% deposit. The amount of equity you have in your current house may also factor in your ability to secure a loan.
Your present house may need to sell within 6-12 months of the bridging loan’s maximum term.
During the bridging term, you may not be able to use a redraw facility on the bridging loan.
There may not be bridging loans available for company acquisitions or the purchase of strata titles.
Want to learn what bridging loan rates 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.