What is Bridging Finance?
Bridging finance provides a practical solution when you need to purchase a property before selling your existing property. This short-term financing option lets you bridge the gap between buying and selling, giving you the flexibility to secure prime opportunities in Morningside's local property market.
Unlike traditional home loans, bridging loans are designed specifically for situations where timing matters. These loans offer the breathing room you need to make strategic decisions.
How Bridging Loans Workk
When applying for a bridging loan, you'll typically encounter two key debt phases:
• Peak Debt: This represents the maximum amount you'll owe, including both your existing mortgage and the new loan for the development site
• End Debt: This is what remains after you sell your current property and pay down part of the bridging loan amount
The loan term usually ranges from 6 to 12 months to sell your existing property, or up to 12 months if the new property is being built. This timeframe gives you adequate opportunity to complete your property sale without rushed decisions.
Understanding Interest Rates and Loan Costs
Bridging loan rates typically sit higher than standard home loan rates, reflecting the short-term nature and increased risk. You'll encounter both variable interest rate and fixed interest rate options, depending on your lender and financial situation.
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Most lenders offer interest capitalisation, meaning you won't need to make monthly repayments during the bridging period. Instead, the loan interest rate compounds and gets added to your total debt. This arrangement helps manage cash flow while you're carrying two properties.
Loan to Value Ratio and Borrowing Capacity
Your loan to value ratio (LVR) plays a crucial role in determining your borrowing capacity. Most lenders will assess:
- The contract purchase price of the new development site
- The estimated sale value of your existing property
- Your overall financial position and income
Depending on your LVR, you might need to pay lenders mortgage insurance (LMI). However, some lenders offer interest rate discounts for borrowers with strong financial profiles or lower LVR ratios.
The Application Process Made Clear
The application process for bridging finance involves several key steps:
• Gathering bank statements and financial documentation
• Property valuations for both existing and new properties
• Assessment of your borrowing capacity
• Loan pre-approval to strengthen your purchasing position
Should You Buy or Sell First?
This common dilemma affects many property investors in Morningside. Bridging finance removes the pressure of this decision by allowing you to:
• Secure the development site when it becomes available
• Avoid potential capital gains implications of rushed sales
• Take time to properly market your existing property
• Access better prices in both transactions
Additional Costs to Consider
Beyond the interest rate, factor in these costs:
• Stamp duty on the new development site
• Legal fees for both properties
• Valuation costs
• Potential LMI premiums
Some borrowers choose to link an offset account to help reduce interest charges during the bridging period. This strategy works particularly well if you have substantial savings or receive rental income.
Access Bridging Loan Options Across Australia
At LBK Lending, we can access bridging loan options from banks and lenders across Australia. This broad network means we can find solutions that match your specific requirements.
Calculating bridging loan repayments involves considering both the variable loan rates and your exit strategy. We work with you to model different scenarios, ensuring you understand the financial commitment before proceeding.
Bridging finance opens doors that might otherwise remain closed due to timing constraints. For Morningside investors looking to enter the development market, these loans provide the financial flexibility needed to act on opportunities when they arise.
Call one of our team or book an appointment at a time that works for you to discuss how bridging finance could support your development site purchase.
