Can You Acquire Real Estate with a Bridging Loan?
Recently updated on February 28th, 2023 at 04:17 pm
There are many ways to finance the purchase of a new property, including getting a mortgage, taking out a different type of loan, or using your savings. Another option you might not have considered before is a bridging loan.
What is a bridging loan?
A bridging loan is a short-term loan that can be used to finance the purchase of a new property before you sell your old one. In most cases, bridging loans are used when people are buying and selling houses at the same time. This type of loan allows you to ‘bridge the gap’ between selling your old home and purchasing your new home.
How much equity do you need for a bridging loan?
To qualify for a bridging loan, you will need to have equity in your property (the more equity, the better). For instance, if your home is worth $200,000 and you still owe $150,000 on your mortgage, then you have $50,000 in equity.
Typically speaking, most lenders will require you to have at least 20% equity in your property before they consider you for a bridging loan. However, some lenders might demand more or less depending on the situation.
How long can you have a bridging loan?
Most bridging loans in Australia are available for up to 12 months, though some lenders may offer longer terms, depending on the circumstances. For example, if you use this type of loan to purchase a property being auctioned, the lender may extend the loan term, giving you more time to sell your old property.
The loan term will also depend on the type of property you are buying. If you are purchasing a residential property, lenders will typically offer a loan term of up to 12 months (with the option to extend the loan). However, if you are purchasing a commercial property, lenders may offer terms of up to 24 months.
As the loan terms, rates and conditions vary from lender to lender, it’s wise to engage with a finance broker and/ or your accountant before proceeding with any loan.
There are a few key terms that you should be aware of when taking out a bridging loan.
- Loan to value ratio (LVR): LVR is the loan amount compared to the property’s value. For example, if you are borrowing $100,000 to purchase a property that is worth $200,000, your LVR would be 50%. Generally, lenders typically consider loans with an LVR of 80% or less. Again, this depends on the type of lender (non-bank lenders, specialist lenders, and private lenders are usually more flexible than traditional lenders).
- Interest rate. The interest rate is the cost of borrowing money and will vary depending on the lender. Bridging loans usually have higher interest rates than traditional mortgages and may be affected by your credit history.
- Repayment schedule. The repayment schedule is the timeline for repaying the loan. Bridging loans commonly have interest-only repayments, which means that you only need to make payments on the interest while waiting to sell your property. However, once your property is sold, you must repay the entire loan amount plus any remaining interest. Some lenders will also provide a capitalised interest option (meaning the loan is paid at the end of the term).
- Exit fee. An exit fee is a charge that some lenders may require when you pay off your loan early. This charge may be a set sum or a percentage of the loan balance. Make sure to ask about exit fees before taking out a bridging loan to avoid surprises down the road.
Eligibility for a bridging loan
There are a few requirements that you will need to meet to be eligible for a bridging loan.
You need to have significant equity in your property to be considered for a secured bridging loan. Your eligibility may also be affected by your credit history. In addition, most lenders require a reliable source of income so you can pay back the loan and/ or a solid exit strategy (i.e. repaying the loan when you sell your current property).
How can you get a bridging loan?
If you meet the eligibility requirements, you can apply for a bridging loan. The application process is usually much faster than applying for a traditional mortgage, typically requires less documentation and can often be done online.
Once your application is approved, the lender will usually order an appraisal on the property that you are looking to purchase. The assessment will need to show that the property is worth at least the amount of the loan that you are requesting.
If everything goes smoothly, you should be able to get your loan quite quickly. Again, non-bank, specialist and private lenders are renowned to be much faster with their loan approvals/ provision of funding (often within days).
Key takeaway
Bridging loans can be a great way to finance the purchase of a new property before you sell your old one. That said, make sure to understand the eligibility requirements of a bridging loan and compare offers from different lenders. A finance broker is well placed to support you with this process.
At Mango Mortgages, we’ve helped thousands of Australians acquire their first bridging loan. You can apply online here.
Mango Credit
Yanis Derums is the Founder and Director of Mango Credit– a leading private lender specialising in bridging loans for personal use and business short term loans for commercial and/ or investment purposes. Yanis has extensive experience with financial analysis, credit assessment, product structuring, and general business management