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Bridging home loans
When you need to move into a new property but you haven’t yet sold your old one, a bridging home loan can help. This form of finance is specially designed to make sure you don’t miss out on buying a new property because of temporary cash flow problems. It can be organised very quickly to help the process of moving go smoothly.
How does a bridging home loan work?
A loan like this means that you can access the funds you need to pay for a new home even before you have received money for your old home. There are two different types of bridging loan:
- Open bridging loans;
- Closed bridging loans.
Open bridging loans are available to people who haven’t yet found buyers for their existing properties. They’re usually arranged for a 12-month period and there has to be a plan in place for what will happen if the property isn’t sold by then. You’ll have to demonstrate that you are making an effort to find a buyer and you will need to have a reasonable amount of equity in the property you’re selling.
Closed bridging loans are available to people who have found buyers for their existing properties but haven’t yet completed all the paperwork. Because there’s less chance of things going wrong at this stage, these loans are usually quite a bit cheaper.
Bridging loans and building
A bridging home loan can also be used if you’re building the home you want to move into. It can free up funds to cover the cost of the build so that you are able to stay in your current property until the new one is ready. This is considerably cheaper than renting in the meantime and it will reduce your overall moving costs.
How does a bridging loan compare to similar products?
Most people find it very difficult to borrow this amount of money through a general loan. There’s an alternative option for securing your new property, which is to place a deposit bond on it. The value of this bond will depend on the value of the property you’re trying to buy, and it will mean you have more time to find the funds you need. You won’t need to pay interest this way, but if you can’t raise the funds by the agreed date then you will lose your deposit. A bridging loan costs money in interest but offers more flexibility with generally lower overall risk.
Easy to arrange;
Gives you fast access to funds;
Bridges the gap between buying and selling;
Helps if you want to build your new home.
Risks and rewards
Closed bridging loans are low cost and low risk. Open bridging loans carry more risk but as long as you work out your contingency plans carefully with the help of a financial adviser, you should be able to avoid finding yourself in trouble. The more honest you are when arranging your loan, the less likely it is that things will go wrong.
Having a bridging loan in place makes the process of moving from one owned property to another far less disruptive. Properly managed, it can also make it considerably less expensive overall.
A property and personal finance writer, Nick Bendel covers property, loans, credit cards, superannuation, and other bank products. Nick has previously written for The Adviser, Mortgage Business, Lifehacker, Business Insider, Yahoo Finance, and InvestorDaily, and loves getting elbow-deep in the latest ABS, APRA and RBA data.