Bridging Finance – How Does it Work?

If you are planning on moving home, you may have heard of a bridging loan or bridging finance. It is a short-term loan that is given to people who wish to buy a property before they have sold their own. If you have been looking for a property for many months and something special comes along, you want to grab it before anyone else. But if you haven’t sold your home, how can you finance the deal?

Understanding a Bridging Loan

If you are thinking about bridging loans in Australia, there are plenty of ways to secure the funds. Alternative lenders offer good rates on bridging loans as they continue to compete with traditional money lenders such as banks and credit unions.

A bridging loan is also known as an addition loan, as it offers you funds to purchase property while you wait to sell your home. During the bridging period, you will have two loans while you wait to bridge the gap. It is a type of interest only home loan that runs alongside your mortgage.

Structure

The structure of the loan depends on your lender, the value is generally calculated according to the equity in your current property. The loan is generally short-term to give you time to sell your existing property and pay off the balance. With some lenders, if the property is not sold within a certain timeframe, they interest rate on the loan goes up.

Key Elements

When you apply for a bridging loan, a single lender generally looks after both loans. This means they provide finance for the property and take over the mortgage on your existing property. The lender may also change the status of the loan, usually shortening the period.

After you sell your property, the lender may change the status of the loan. It usually converts to a loan with interest and principal repayments. This only happens when you settle the mortgage on your existing property. It is important to ask the lender what loan conditions and interest rates will apply after the bridging period has finished.

If you are thinking about applying for a bridging loan, you should weigh up the pros and cons of the loan before you decide to do anything. Like any financial option, it will have its benefits and disadvantages. Before using a lender, do plenty of research and try to find a bank or alternative lender who offers you the best option.