A bridging loan is a type of short-term finance used to “bridge the gap” between the purchase of a property and the longer-term funding arrangements. In other words, it can be used to buy a property before the buyer’s current home has been sold. In this article, we discuss how bridging loans work in Australia.
Bridging loans are typically interest-only loans, with repayment due at the end of the term. This means that monthly repayments are lower than on a repayment mortgage, giving the borrower more flexibility.
The main advantage of a bridging loan is that it can provide quick access to finance, which can be vital when buying a property at auction or in a chain.
However, bridging loans are also expensive, with high-interest rates and fees. They are also risky, as the borrower will be repaying the loan with money from the sale of their property, which may not happen if the property market slows down or if they are unable to sell their property.
Before taking out a bridging loan, borrowers should consider all of the risks and costs involved, and make sure that they are able to repay the loan on time. Bridging loans should only be used as a last resort when all other options have been exhausted.
If you’re thinking of taking out a bridging loan, make sure to compare the different deals on the market to get the best deal possible. You can do this by using a mortgage broker, who will be able to find the best deal for your circumstances.
Bridge Loan Costs
There are a few different types of bridge loan costs that you should be aware of before taking out this type of financing.
Bridge loans are typically short-term loans that are used to finance the purchase of a new home before the sale of your current home is complete.
This type of loan can be very helpful in situations where you need to move quickly and cannot wait for your current home to sell before buying a new one.
However, it is important to understand all of the associated costs before taking out a bridge loan so that you can make an informed decision about whether or not this type of financing is right for you.
- Interest rate
The first type of bridge loan cost is the interest rate. Interest rates on bridge loans are typically higher than those on traditional mortgages.
This is because bridge loans are considered to be a higher risk for lenders. In order to offset this risk, lenders charge higher interest rates on bridge loans. You should expect to pay an interest rate of at least 2% higher than the current mortgage rates.
- Origination fee
The second type of bridge loan cost is the origination fee. This is a one-time fee that is charged by the lender in order to originate the loan.
Origination fees can vary greatly from lender to lender, so it is important to shop around and compare fees before choosing a lender. Origination fees typically range from 1% to 3% of the total loan amount.
- Closing cost
The third type of bridge loan cost is the closing cost. Closing costs are the fees associated with closing on the loan.
These fees can include appraisal fees, title insurance, and other miscellaneous costs. Closing costs are typically around 2% of the total loan amount.
- Prepayment penalty
The fourth type of bridge loan cost is the prepayment penalty. Many lenders charge a prepayment penalty if you pay off your loan early.
The amount of the prepayment penalty will vary from lender to lender, but it is typically around 2% of the total loan amount.
Bridge loans can be a great way to finance the purchase of a new home before your current home sells. However, it is important to understand all of the associated costs before taking out a bridge loan so that you can make an informed decision about whether or not this type of financing is right for you.
If you are interested in learning more about bridge loan costs, please contact a mortgage professional today.
Types Of Bridge Loans
Bridge loans are typically more expensive than traditional mortgages because they are considered to be higher risk.
However, they can be a good option for those who need to move quickly and cannot wait for their old home to sell before buying a new one.
There are two main types of bridge loans: closed-end and open-end. Closed-end bridge loans are typically used to finance the purchase of a new primary residence before the sale of the old home is complete. These loans are typically repaid when the old home is sold and the loan balance is paid off in full.
Open-end bridge loans, on the other hand, are used to finance the purchase of a second home or investment property before the sale of the borrower’s primary residence.
These loans are not typically repaid until the borrower’s primary residence is sold. Because they are not backed by collateral, open-end bridge loans are generally seen as riskier than closed-end bridge loans.
Bridge loans can be a helpful tool for those who need to move quickly and cannot wait for their old home to sell before buying a new one.
However, they are typically more expensive than traditional mortgages and should only be used as a last resort. Borrowers should carefully consider all of their options before taking out a bridge loan.
What Are The Pros And Cons Of A Bridging Loan?
A bridging loan is a type of short-term finance that can be used to ‘bridge the gap’ between the purchase of a new property and the sale of an existing one.
In other words, it can help you buy a new home before you’ve sold your old one, meaning you don’t have to move out of your current property until you’re ready.
There are several advantages to taking out a bridging loan, including:
You won’t have to move out of your current property until you’re ready. This means you can take your time finding your perfect new home, without having to worry about being forced to move out of your current one before it’s sold.
A bridging loan can be a quick and easy way to access the funds you need to buy a new property. Unlike a traditional mortgage, which can take weeks or even months to be approved, a bridging loan can often be arranged in just a few days.
A bridging loan can be a flexible form of finance, as you can choose how long you want to borrow the money. This means you can tailor your repayments to suit your own personal circumstances.
If you’re able to repay the loan within a short space of time, you may be able to benefit from lower interest rates.
This is because bridging loans are typically only charged at around 0.5% per month, meaning the overall cost of borrowing can be very low if the loan is repaid quickly.
Disadvantages of a bridging loan
There are also some potential drawbacks to taking out a bridging loan, which you should be aware of before making a decision. These include:
Bridging loans can be expensive. Although the interest rates are usually low, the fees charged by lenders can add up to a significant amount. This is why it’s important to shop around and compare different deals before committing to anything.
Bridging loans are a high-risk form of finance, which means they’re not suitable for everyone. If you’re unable to repay the loan within the agreed timeframe, you could end up losing your home.
Despite these potential disadvantages, bridging loans can still be a useful financial tool for those who need to borrow money for a short period of time.
If you are considering taking out a bridging loan, it is important to shop around and compare interest rates and terms before signing up for a loan.
By doing this, you can ensure that you get the best deal possible on your loan and avoid any potential pitfalls.
Is A Bridging Loan Secured?
Bridging loans are typically secured against property, which means that if you default on the loan, the lender could take possession of your property. This makes them a high-risk form of finance, so they tend to be more expensive than other types of loans.
If you’re thinking about taking out a bridging loan, it’s important to speak to an experienced financial advisor to make sure it’s the right option for you.
How Does A Bridging Loan Work?
Bridging loans are typically used when someone is buying a new property before selling their old one. The loan is used to cover the cost of the new property purchase until the old property is sold.
For example, let’s say you have a property valued at $500,000 that you’re selling. You’ve found your dream home that’s on the market for $750,000.
You can’t get a traditional mortgage because the bank won’t lend you the money until your old property is sold.
This is where a bridging loan comes in. You can take out a bridging loan for the $250,000 difference between the sale price of your old home and the purchase price of your new one. This type of loan is typically paid off within 12 months.
A bridging loan can be an excellent way to secure the financing you need in a hurry. The costs are relatively low, and the process is simple. However, it’s important to understand all the pros and cons before signing up for one of these loans. Bridging finance is a tool to help you into your new home, but there are different solutions that can do that too, which is why you need a good mortgage broker to discuss your options. Get in touch with the team at Mortgage Broker Home Loans today.