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What Is a Bridging Loan and When Would You Use One?

There are a lot of different finance options available from multiple lenders in Australia. It can get a little confusing when you don’t understand all the types of loans available, therefore making it difficult to choose the best finance option for your needs. It’s important to first get familiar with the options available, so you can then pick the right kind of loan. In this article, we’ll take a look at bridging loans, to include what a bridging loan is and when you might consider applying for a bridging loan.

 

What Is a Bridging Loan?

Bridging loans are a common loan type, which as the name suggests, is used to ‘bridge the gap’ between the time it takes to sell your current home and buying a new home – and a way of tapping into your home’s equity before the funds from a sale are available. As such, a bridging loan can be a good alternative when you need to act quickly to secure a new property and the settlement dates for purchasing and selling don’t match, which is often the case.

Bridging loans are taken out on top of your current home loan and are often interest-only loans. Bridging loans are also designed to be short-term loans that can be repaid relatively quickly.

 

Considerations Before Applying For Bridging Finance Australia

It’s important to understand that a bridging loan is an additional loan. In most cases, you’ll be paying interest on, and making repayments for, two loans until your current house is sold. With some lenders, the interest and repayments are added onto your bridging loan and you don’t start making repayments on the principal until your house is sold.

Usually, a bridging loan will be calculated on the value of the equity you have established on your current property. Some lenders will also charge higher interest rates on the loan if your property is not sold within a specified time period. Keep in mind that the criteria of lenders vary, so it’s important to fully understand the terms and conditions of the lender you choose to go with before you commit yourself to a bridging loan.

When your existing home does get sold, the bridging loan is usually discharged and becomes a part of your new home loan. Once more though, check with your lender on this point.

Keep in mind that interest will be applicable on both your current home loan as well as your bridging loan, so the longer it takes to sell your home, the more interest your loans will accrue. If for some reason you believe it will take a long time to get your house sold, you’ll need to think hard about whether a bridging loan is the best finance option for you.

 

A Bridging Loan For Personal Use

Rather than be limited to bridging the gap between selling your home and buying a new property, some lenders, particularly in the private sector, allow you to use the equity in your bridging loan for other purposes. This is a handy option to look out for, as you may have other needs for the money you borrow.

One example might be that you need to perform some repairs or renovations to your existing property in order to attract buyers and get it sold. Or, you may have a personal debt that needs to be repaid in a quick time, a debt that simply cannot wait until your property is sold. Other options for using a bridging loan for personal use could be paying for legal fees, moving costs, or even for medical treatment.

Again, this all depends on the lender’s criteria, so that should always be checked first before applying for bridging finance. It’s always a good idea to speak with the lender and become familiar with everything about the bridging loan before applying for a loan. Most importantly, make sure you’re clear about the loan repayment schedule.

 

Key takeaway

Bridging loans in Australia are well-established and can be a great choice if you need to act fast to secure your new dream home and haven’t yet sold your current residence. Though like with any form of finance, it’s important to work out exactly what you need, then shop around for a lender that matches up with your requirements. A mortgage broker can also help with this process.

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