If you are looking to sell the current home you live in and buy a new one to move into, then the term bridging home loan may be familiar. Buying a home is a complex process. It involves coring the real estate market for months on end, viewing too many open homes to count and securing the mortgage loan before going ahead.
At the same time, you have to put your current home on the market. Juggling your search for a new home with trying to find the perfect buyer isn’t easy. To top things off, what happens if you find the next dream home before selling yours? Let’s take a look at how does a bridging home loan work.
How Does A Bridging Home Loan Work?
In an ideal world, you would sell your old home and then use the money you free up to purchase a new home. But things don’t always work this way. The real estate market can be unpredictable, and it wouldn’t be fair to miss out on an amazing opportunity while waiting for your current home to sell. This is where a bridging home loan comes into the picture. So, how does a bridging home loan work?
Simply put, the idea of a bridging loan is to give you access to the funds you need to buy this new home, while you wait for your old home to sell.
How does a bridging home loan work? This is a short-term loan that covers the price of your new home while giving you time to sell your old one.
Features Of A Bridging Loan
A bridging loan will work differently depending on what lender you choose to go with. Here are some of the common features you can expect:
- It’s usually an interest-only loan. You simply cover the interest while waiting for your home to sell, and then pay it off once this happens.
- The value of the bridging loan is usually calculated based off the equity you have in your old home.
- It is usually a short-term loan with a set time frame.
- If your old home is not sold within the set timeframe, then a higher interest rate can be charged.
Of course, you might naturally be wondering what happens to the bridging loan once the old home is sold. In most cases, the old mortgage is discharged, and the bridging loan is converted into a home loan for your new property.
Types Of Bridging Loans
There are two different types of bridging loans to choose from:
- Closed bridging loans: in this loan, you agree on a date your old home will be sold by. Once it sells, you pay out the principal on the bridging loan. This type is ideal for people who have already agreed to a sale but are still waiting for it to come through.
- Open bridging loans: this type of loan doesn’t have a set settlement date – although is still a short-term loan. This is ideal for those who are yet to find a buyer.
In order to take out a bridging loan, you will need to have a certain amount of equity in your existing property – the amount varies from lender to lender. If you don’t, it’s still possible. You can just expect to pay a higher interest rate on your loan.
How Does A Bridging Home Loan Work? Case Study.
Wondering, how does a bridging home loan work? Let’s take a look at a specific example.
Your house has been sitting on the marketing for the past six months, waiting for the right buyer to come along. While you are waiting, you have been keeping an eye on the marketing for a new home for yourself as well. You end up finding this house first and don’t want to pass up the amazing opportunity in front of you. In this scenario, you will need additional finance to cover the gap in time between buying your new property and receiving the funds from the sale of your old one.
This is where the term ‘bridging term’ comes from. The idea is to bridge that gap until the money comes available.
How does a bridging home loan work? You end up paying your old home loan, as well as a bridging loan on top. It’s important to ensure you have the money available to be able to cover both loans. When you do (finally) sell your old home, you then have 12 months to repay the cost of the bridge.
Taking Out A Bridging Loan
If you are looking for a bridging loan for your situation, then get in contact with the experts at NSW Mortgage Corp here. We offer a range of options when it comes to short-term loans and will be able to work with you to find the right solution.
