What is a Bridging Loan?
Bridging loans are designed to provide short-term financing to help home buyers bridge the gap between selling their existing property and buying a new one. There are two types of bridging loans: no end debt and end debt bridging loans.
No end debt bridging loan
A no end debt bridging loan, as the name suggests, has no set repayment date, and you’ll pay the interest charges and the loan balance in full when the loan matures. This option is great if you are looking to downsize your home because you can sell your property quickly and use the money to pay back the loan when it ends.
End debt bridging loan
If you’re upsizing your home, an end debt bridging loan may be a practical option. This loan is split into two parts: a short-term loan that covers the costs of selling the existing property, and a long-term loan for buying a new property. When your property is sold, the money is used to repay the short-term loan component, leaving the borrower with a long-term loan for the new property. This option is good for borrowers who are uncertain about when their property will sell, giving them more security and confidence.
Before taking out a bridging home loan, it’s important to understand the concept of ‘peak debt’ and ‘end debt’. Peak debt is the highest level of debt a borrower will incur before they sell their existing property and repay the loan. End debt, on the other hand, is the total amount of debt that remains at the end of the loan term.
Let’s look at a case study below:
A working couple lives in an apartment in Melbourne and they are planning to upsize their home. They happen to come across an ideal house in a location they like but they don’t want to lose out on it, so they apply for a bridging loan while they try to sell their apartment. The existing mortgage balance on the apartment is $250,000 and is then transferred into the bridging loan, which has a maximum term of 12 months. the couple also got approved for a $750,000 loan for their new house, resulting in a total peak debt of $1,000,000
After selling their apartment for $450,000 within seven months, the couple utilized $250,000 to pay off their initial debt, leaving them with $200,000 in proceeds. They used this amount to pay off the peak debt, which resulted in an end debt of $800,000. Following the sale of their property, their home loan transitioned to regular principal and interest payments under a Full Doc Prime home loan product.
Here is a list of common reasons why home buyers take out a bridging home loan in Australia:
- To purchase a new property before selling your current one
- Taking advantage of a favourable property market
- Versatility of being able to complete home renovations before listing
- Giving you the confidence to look for a new home without selling your existing property
- Skip the trouble of thinking about where to live during the time period of searching and buying your new home
Ultimately, you should consider your individual circumstances and financial goals before taking out a bridging loan.
At Brighten, we understand that everyone’s financial situation is different. That’s why our bridging loan product Brighten Connect is designed to provide borrowers with flexibility. During the Bridging Period, the interest budget will be retained and no repayment will be required.
If you’re in need of short-term financing to bridge the gap between buying a new property and selling your existing one, contact Brighten today to learn more about our bridging loan solutions.