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How do bridging loans work?
A bridging loan covers the purchase price of a new property and gives you time to sell your existing property, even if you have a mortgage.
Essentially, this type of loan “bridges” the gap between buying and selling, which can be advantageous if you’ve found your dream home and haven’t successfully sold your home yet.
A bridging loan can also provide the finances you need to build a new home while you continue living where you are.
This is an interest-only short-term loan — once your loan has been approved, you normally have a bridging period of around six months to sell your existing property or 12 months if a new house is under construction.
During this time, the minimum repayments will be calculated on an interest-only basis and can be capitalised until the existing home is paid.
Your lender will typically take over the mortgage on your existing property and finance the purchase of a new one. The total amount borrowed is called “peak debt” and includes the balance of your existing mortgage, the contract purchase price of your new home and any purchase costs like stamp duty, legal fees and lenders fees.
Once you sell your existing home, the sale proceeds (minus costs like real estate fees) are used to reduce the “peak debt”.
The remaining debt then becomes the “end debt” which is paid as a standard mortgage from then on.
Bridging loans vs deposit bonds
In the finance world, a lot of jargon is thrown around which can be confusing for aspiring homeowners. For example, “bridging loans” and “deposit bonds” are often interchangeable, leaving some homeowners lost in translation.
The truth is, bridging loans and deposit bonds achieve the same thing, but in different ways. The Australian Securities and Investments Commission defines deposit bonds as a financial agreement that can be used “in place of a deposit when a buyer exchanges contracts on a property”.
This guarantees to the seller that the buyer will pay the full cash deposit on an agreed date. The deposit bond amount takes the place of cash when buying a new home, usually covering up to 10% of the purchase price.
A bridging loan is a short-term loan that is used to cover the costs of buying a new property, while waiting on the sale of an existing property. These are generally interest only and the value is calculated according to the equity in the current property. These loans are generally limited to 6 months.
Watson Mortgages: Your number one choice for bridging finance in Newcastle
At Watson Mortgages, we’re committed to finding you a great bridging loan to make homeownership in Newcastle more achievable.
Bridging loans are one of the ways to “bridge the gap” between your current home and your dream home. We partner with more than 20 lenders to provide local homeowners (or aspiring homeowners) with short-term loans, we can also connect you with local financial planners, lawyers and bankers to make the process feel more secure.
Your personal mortgage broker will make the loan application process feel simple and stress-free. Our team will do all the legwork for you, from finding and comparing bridging loans and interest rates to monitoring market conditions, organising paperwork and applying for preapproval.
Throughout the process, you will be the one to call the shots and make the final decisions, while we provide recommendations and advice to guide you towards the most suitable bridging loan. Plus, we will always ensure you understand the process and provide regular updates so you can see how your loan application progresses.
For more information about bridging finance in Newcastle, contact Watson Mortgages today.
Contact Watson Mortgages for an obligation-free consultation
Frequently asked questions
How much do bridging loans/deposit bonds cost?
Different issuers charge different fees for deposit bonds. The total amount depends on the value of the property you’re looking to purchase and the value of the deposit bond being taken out, as well as if you have been pre-approved for bridging finance in Newcastle. According to Canstar, who completed a review of several deposit bond companies, a buyer can expect to pay between 1.2% and 1.5% of the total purchase price.
We recommend comparing different deposit bond issuers with us before committing to a particular deposit bond.
How long does it take to get a deposit bond approved?
Getting a deposit bond is actually quite a quick and streamlined process. According to Deposit Bond Australia, applicants can receive their bond between four and 48 hours, depending on the complexity of the application.
What are the risks associated with bridging loans and deposit bonds?
A few hurdles are involved with getting a bridging loan or deposit bond. You may not be issued funds due to:
– Refusal from the vendor. Not all real estate agents and vendors will accept a deposit bond. Be sure to check this under the contract conditions before committing to a sale.
– Financial checks. By law, you must pass financial checks by the issuer. Like home loans, deposit bonds are a form of credit and are covered by the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act).
– Fees and charges. Anyone using a deposit bond is required to pay fees and charges on top of the amount covered by the deposit. Before agreeing to enter a contract, find out how much the deposit bond will be so you can calculate additional costs.
Can you pay off a bridging loan early?
A bridging loan is a short-term loan, meaning it’s quite flexible and, in most cases, does not charge exit fees if you repay early. A bridging loan charges interest for as long as it has not been paid, so the sooner you pay off your bridging loan, the more you’ll save on interest repayments.
What are open and closed bridging loans?
Closed bridging loans are used if you already have a contract of sale on your existing property and know the date when your home will be sold and when the funds will be received. You’ll repay the loan (and any accrued interest or fees) on this date.
An open bridging loan is used if your current property hasn’t yet sold. This can be arranged for up to 12 months.
When is the best time to sell to minimise the bridging loan period?
You never know when you’ll find your dream home, and the timing doesn’t always align with real estate market conditions. Here are a few quick property market tips to remember when it comes time to sell:
- Seasonality — Spring is the most popular time to sell in Australia, but there are benefits to selling in quieter periods like winter. With fewer properties on the market, the more buyers you will have inspecting and competing for your current property (this is what’s called a seller’s market when the demand for homes is higher).
- Patience — If you’re selling in the buyer’s market (i.e. the number of houses for sale is greater than the number of buyers), you will need to be patient and realistic about the value of your home.
- Research — Keep up to date with what’s happening on the property market, e.g. interest rate movements, weekly property sales, and the economy as a whole. This will tell you when it’s time to make a move and sell your existing home or property.
What if a bridging loan isn’t right for me?
Bridging loans have their pros and cons (e.g. having two mortgages at once), which we will explain to you during our initial consultation. However, if you’ve successfully sold your existing home and need to find a new property, here are a few things you can do to ease the transition.
- Negotiate a longer settlement period on the sale of your home, so you have time to house-hunt and move.
- Rent your home from the new buyer, so you have more time to find a new property.
- Stay with family and store your belongings, or rent furnished accommodation until you’re ready to move into your new home.
Our team will also provide a wide range of loan options to ensure you’re comfortable with loan payments, interest, and the timeline for your big move.
Contact Watson Mortgages for an obligation-free consultation
For deposit loans and bridging finance in Newcastle, contact the team from Watson Mortgages today. Our services are complimentary, convenient and flexible so that you can access finances sooner.