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What are bridging loans?
Bridging finances or a “bridging loan” covers the purchase price of a second property and gives you time to sell your existing home, 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 the home of your dreams 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 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 proceeds of the sale (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 deposit on an agreed date. The deposit bond 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, plus we can connect you with local financial planners, lawyers and bankers to make the process feel more secure.
Our goal is to help take some of the hassle out of the loan application process. We’ll do all the legwork for you, from finding and comparing bridging loans and interest rates to 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 loan option. 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.
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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 house you’re looking to purchase and the value of the 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 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?
There are a few hurdles 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.