Quick guide: how to use short-term loans for bad credit

Credit score, also known as Credit rating, represents your reputation as a borrower. This number helps lenders determine your ‘risk profile,’ which impacts the amount of money they’ll lend, as well as the rate and terms. You can negotiate deals or know why a financial institution rejected you when you know your Credit score.

In general, the higher your score is, the more ‘credit-worthy’ you’ll be considered by lenders. This means you’ll have a higher chance of getting the loan approved, as well as be offered more competitive rates and terms.

Though what about when your credit isn’t as great? The good news is that non-bank lenders, specialist and private lenders have more flexible criteria and will often lend to borrowers with impaired credit. So, what are the ways to get short-term loans if you have a bad credit? Here’s an overview to get you started.

How to determine Credit score

A Credit score is based on an individual’s personal and financial information. Depending on the Credit bureau, the number is usually between 0 – 1,000, or 0 – 1,200. This score is typically on a five-point scale: excellent, very good, good, average and below average. A Credit score is also dynamic and can change from month to month as your financial circumstances change.

You can access your credit score and credit report from various credit reporting bureaus. Each bureau uses a slightly different algorithm to determine your score. They may also have different information about you, which can result in varying credit scores.

A credit score is calculated according to what’s in your credit report. The credit reporting agencies look at the following to understand your behaviour as a borrower:

  • Credit history: This includes the presence of high-risk indicators, repayment history of your credit accounts, type of financial lending institutions you’ve submitted applications to.
  • Previous credit applications: This includes the number of credit enquiries, number of loan applications you’ve made, amount and type of loan you have applied for in the past.
  • Credit profile: This includes your age, duration of employment, age of credit history, credit cards, and current credit limit.

What does it mean to have bad Credit?

A bad Cedit score can limit your borrowing potential and make you less appealing to some lenders. This is because it suggests that you’re not financially stable and potentially high-risk. The lower your Credit score is, the higher your chances of being rejected for funding. You may also not be eligible for 0% interest credit cards or loans.

A bad Credit rating can result from many different factors, including late or skipped payments, defaults, numerous credit accounts and applications, serious credit infringements, or bankruptcy, a short Credit history, a lot of accumulated debts relative to your income – or any combination of any of these factors.

If you find out that you have a low credit score, you shouldn’t be discouraged. You can still take some steps to improve your score. Here are some areas to consider:

  • Check your credit report. It may contain errors like incorrectly listed late payments. If you find one, discuss it with the credit reporting agency to ensure it’s resolved.
  • Pay your bills on time. Late payments and defaults can negatively impact your credit score.
  • Think carefully before applying for any new credit account. New accounts can lower your average account age.
  • Manage your credit cards responsibly.
  • Pay down any existing debts and loans.
  • Get current and stay current with your missed payments.
  • Seek the guidance of a financial counsellor, such as a financial planner or an accountant.

Information on your credit report remains for varying lengths of time, depending on what it relates to. Your repayment history information usually stays on file for two years, whilst overdue accounts, payment defaults, credit enquiries and court judgements often remain on your report for up to five years. Overdue accounts that are considered serious credit infringements can stay on your credit report for up to seven years.

Over time, the negative items will still be dropped off. Moreover, with the mandatory comprehensive credit reporting, positive behaviour like paying your bills on time is listed on your credit report. This can help improve your score over time.

Additionally, there are short-term loans or bad credit loans that you can apply for. Many specialist lenders, private lenders and fintechs offer products that can cater to individuals with limited credit history, who may have difficulty in getting approved for finance by traditional lenders.

The good thing is short-term loans in Australia allow people with poor credit ratings to borrow money without the usual judgment and denial from traditional institutions. Short-term loans require minima, or sometimes no documentation. With their reduced requirements, short-term loans often are charged with slightly higher interest rates to counterbalance the inherent risk of lending to those with impacted credit.

Ways to get a loan with bad Credit

Here are some steps to consider when looking for short-term loans if you have affected credit:

1. Check your credit score and credit report

Checking your credit score and credit report lets you know about any negative marks on your record. If there’s an error on your report, you can correct it before applying for a loan.

2. Shop around for potential lenders and the most suitable product

A low credit score can be a reason why borrowers may not qualify for cheaper loans that have longer terms. That said, don’t despair! You can still find a good deal. As you shop around, you’ll see that there are other options available that may have more flexible lending rates and standards.

Private lenders, specialist lenders and fintechs also offer a variety of short-term loans without the traditional qualification guidelines required by banks and traditional lending institutions. They are also flexible in their loan terms.

3. Do your research

Be sure to spend time researching the selected lender’s background to make sure they’re established and reputable. If it’s someone you don’t recognise, check out their reviews or if there’s any complaint made against them. A mortgage broker can help you with this process.

4. Borrow from the equity of your home

A lot of short-term loans will allow you to tap into the equity in your home as the basis for receiving funds for various purposes for personal or business use.

Key takeaway

Short-term lenders can be a good alternative if you have a lower credit score or bad credit. There are many types of short-term lenders including non-bank lenders, specialist lenders, private lenders and fintechs. These lenders are less rigid in their requirements and are known to provide fast funding with flexible terms.

 

What happens to your mortgage loan when you sell a house?

Selling and moving houses whilst the mortgage is not yet fully paid off is common among homeowners, as not everyone owns their home outright. A lot can happen within the repayment period of standard home mortgage loans, which often have a term of up to 20 to 30 years. You may need to upsize, downsize or relocate for work. You may have additional kids or become empty nesters, requiring more or less space. Or simply, your current house may not be the right one for you.

So, what happens to your mortgage loan when you decide to sell your house? What impact does it make? If you’re one of the many Australians who are wondering about this, read on.

How a mortgage works

When you get a mortgage, your lender puts a ‘mortgage’ on your house or property. This means they have a formal interest in it. You’re entitled to keep your mortgage if you continue to make payments, as scheduled. Though, if you fail to make your mortgage repayments and can’t pay them back, the lender can insist you sell your property so they can recover the money they’ve let you borrow.

When you sell your property, your lender no longer has the right to sell it, but they expect you to repay the money you’ve borrowed.

What is the process of selling your house before paying off the mortgage?

Arranging a mortgage discharge is important if you plan to sell your house. Before settlement, you must be able to get your mortgage discharged to avoid delays in settlement. Any existing mortgage loan will be registered on the certificate of title as an encumbrance. This will then limit your capacity to transfer the title of your property.

Getting a mortgage discharge usually takes around two to three weeks. The process involves filing a formal discharge of mortgage. Once this has been lodged, your existing lender will speak with your conveyancer or solicitor to sort out the settlement. The land title office in your state or territory will then be informed about the discharge by the lender. They will then register the mortgage discharge to indicate that they no longer hold an interest in your property.

What are some scenarios when selling your house with a mortgage?

Negative equity

Negative equity refers to a situation when you sell your house at a value that’s below your home loan balance. This occurs when house prices in the market are dropping. If you happen to sell whilst your house is in negative equity, you’ll still need to pay back the shortfall and be required to make your mortgage repayments at the same rate.

Here are some areas to consider to help avoid or reduce negative equity before you sell your house:

  • Make renovations and improvements to increase the property value
  • Make additional home loan repayments
  • Understand your equity by getting a professional valuation
  • Do property research

Getting a bridging loan

Selling your house first usually provides the necessary funds to purchase your new one. Or in other words, you’ll get the payout from selling your old house and then use it to make the down payment or purchase your new house. Alternatively, if you have considerable equity in your house and a stable income, buying your new house before you sell your existing home may be an option.

What about if you buy first, but you don’t have enough funds to cover the down payments and other costs for the new home? In this scenario, a bridging loan could be worthwhile considering.

A bridging loan is a short-term or temporary loan that allows you to borrow money and make your down payment for your new home, as well as pay off your old mortgage. Many private lenders, specialist lenders and fintechs offer this type of loan. You can take out a bridging loan whilst waiting for the proceeds from the sale of your old home to become available. Once you get the funds from the sale, you can use them to pay off the bridging loan.

What are the costs of selling your house with a mortgage?

Selling your house with a mortgage may include the following costs:

  • Discharge request fee. This is charged to end your contract with your lender.
  • Break fee. You may need to pay a break fee if you have a fixed rate home loan. The break fee amount depends on how much money you still owe to your lender and how long is left in the fixed term.
  • Conveyancing fee
  • Real estate agent fee

Can you keep your mortgage after you sell your house?

If you sell your house that is on the mortgage, the earnings from the sale will be used to pay the loan off. So, no, you can’t keep your mortgage after you sell your house. However, if you sell your house and immediately buy another, you may be able to transfer your mortgage (meaning may be able to switch your old or existing mortgage loan to your new house).

Key takeaway

Selling a house before paying off the mortgage is possible, but you will need to arrange for a mortgage discharge to do so. Before you look for someone to buy your house, it’s essential to make sure you’re up to date with your mortgage payments, and you can cover all costs that go along with selling a house. A mortgage broker or an accountant can also help you understand your options and support you in making the right decisions.

 

Caveat vs Mortgage Loans: What is the difference between the two?

If you’re thinking about borrowing money for personal use or quick cash flow injection, you can consider a number of different loans, including a caveat loan or short-term mortgage loan. These two common finance options are available for individuals and businesses.

Here’s a quick guide that provides a brief overview on the differences between these two secured loan types to help you further understand your short-term finance options.

What is a caveat loan?

A caveat loan is also known as an ‘unregistered second mortgage’ or an ‘equitable mortgage,’ but it’s not like a normal mortgage.

If you own some residential or commercial property, you can use it to take out a loan that’s secured against the value of the property. When the lender approves your application, they lodge a caveat on the title deed of your property. The loan can be lodged on the title, behind your existing mortgage, without requiring consent from your bank to do so.

A caveat gives security to the loan. It shows that the lender has a registered financial interest in the property and indicates that the property has been used as security.

A caveat also serves as a form of an injunction. This formal notice prevents any other dealings on the property until the loan is settled. If a third party tries to register a dealing on that property, the caveat loan provider gets notified. A caveat also prevents you, as a borrower, from selling the property without the permission of the lender or the caveat loan provider.

Once a caveat is lodged on the title of a property, the loan can become available within a few days after application. A property can be used only for a single caveat loan at any one time. Upon loan repayment, the caveat is immediately removed from the property, and it can then be used for another caveat loan if needed.

Short-term caveat loans are increasingly common. They are quick to apply for, require minimal documentation and can also be approved and settled quickly. In particular, private lenders, specialist lenders and fintechs usually are more flexible with credit history (meaning they’ll often approve borrowers that have limited credit history). Short-term caveat loan terms are also flexible (usually between one month and a few years).

What is a mortgage loan?

Another way of securing business finance is through mortgage loans or mortgage financing. This type of loan is not the same as a home loan, which is specifically designed to finance the construction or purchase of a residential property. A lot of lenders don’t’ impose restrictions on how a mortgage loan should be used, as long as you can show a clear exit strategy (meaning how the loan will be paid on time).

Historically, home mortgage loans have been long-term loans provided by banks, which are usually between 20 and 30 years. However, many alternative and private lenders now provide short-term mortgage loans that have a duration of 2-36 months. This is beneficial for borrowers who may only need access to funds for a shorter period of time.

Similar to a caveat loan, mortgage financing is secured against a property. Once a lender approves your application, they lodge their interest against the title deed of your property.

Additionally, you can use a single property as security with more than one lender by taking out a second mortgage. In the event of a foreclosure, the second mortgage lender ranks second in terms of financial claims. The first mortgage lender is first paid back as a priority, whilst the second one is paid with what’s left from the funds.

Where can you use a caveat or mortgage loan for?

Short-term loans and caveat loans can be used for a variety of personal or business purposes, such as:

  • Purchasing a business
  • Quickly sourcing funding for your business (otherwise known as ‘working capital’)
  • Expanding your business
  • Buying stock for the business
  • Debt consolidation or refinancing
  • Paying a one-off large personal debt like a tax bill
  • House renovation or improvement in preparation for sale.

Which loan type?

All loan types are different. Caveat loans and home mortgage loans are just two of the many financing options offered by traditional lending institutions, private lenders, specialist lenders and fintechs. When deciding which type of loan you should get, it’s important to assess your situation and see which best suits your needs and circumstances. You can also compare the loan amounts, caveat loan interest rates, mortgage interest rates and the repayment terms to help determine which loan type is right for you.

Checking out whether you can afford monthly repayment is also a must. Does it fit your budget? How long will you need to repay the loan, and what will happen if you miss a payment?

When applying for a loan, whether it’s a caveat loan or a mortgage loan, you should not hesitate to approach the lender and seek clarification if there’s anything unclear to you. Specialist short-term lender, Mango Credit, offers fast caveat loans, first mortgages, second mortgages and home equity loans with flexible underwriting and minimal documentation. You can quickly and easily apply online.

If you’re unsure, a mortgage broker or an accountant can help you decide which type of loan best suits your requirements.

Takeaway

If you own a property and need funding quickly, caveat loans and home mortgage loans can be a great source of short-term funds for personal or business uses. Both loan types are widely available from a wide variety of lenders in Australia.

 

5 THINGS TO CONSIDER BEFORE REFINANCING YOUR MORTGAGE

In this article, we’ll look at refinancing your mortgage – what it is, why you might consider it, when you can do it, how it works, common refinancing scenarios, the benefits of refinancing, and things to consider before you refinance.


What is mortgage refinancing?

In simple terms, mortgage refinancing is the process of taking out a new mortgage loan to repay your existing loan. In some cases, it might be with your current lender, but more often, it involves moving your loan to a new lender. This means you need to apply with the new lender, which may require the payment of fees and costs when you pay out your existing loan, as well as for the establishment of the new loan.


Why might you consider refinancing your mortgage?

Mortgages are typically long-term commitments, sometimes as long as 30 years. And a lot can change during this time – market conditions, your financial circumstances, and general life changes. Any or all of these changes can make refinancing your mortgage an attractive proposition.

Better deals with lower interest rates and fees often makes refinancing an attractive proposition. In addition, the emergence of specialised non-bank lenders, private lenders and fintechs, means that there is increased choice.

 

When can you refinance your mortgage?

There is no ‘best’ time to refinance your mortgage, but as a general rule of thumb, you should be reassessing your mortgage relative to your situation and personal needs every two to three years and in line with a fixed interest period. There are a few factors to consider in regards to when is the best time to consider refinancing your mortgage:

  • Do you have at least 20% equity in your home? This is important so you can hopefully avoid Lender’s Mortgage Insurance (LMI). If you have built up more equity since you took out your loan, this can mean you don’t need LMI for the new loan.
  • Are you within a fixed interest term? Generally, it is not a good idea to refinance within a fixed interest period due to the exit fees you may be liable for. Instead, look at refinancing options towards the end of your fixed term period.
  • What’s happening with interest rates? This is typically the most important factor when considering refinancing, as this can equate to significant reductions in your monthly repayments and considerable savings over the entire term of your loan.

 

How does mortgage refinancing work?

The process for refinancing is the same as you would have undertaken when you secured your existing mortgage. You will need to consider the different loans available, including interest rates, whether rates are fixed or variable, and the loan flexibility – such as loan offsets and increased payments.

The good news is that there are a lot of different types of lenders in the market. And, depending on your circumstances, the approval process can be relatively fast.

Importantly, you need to check the terms and conditions of your existing mortgage carefully. In some cases, lenders may include financial penalties for paying out your loan early. This can take the form of break costs or associated fees. Therefore, any savings you expect to make by refinancing need to be considered in the context of any costs to end your existing mortgage. Note too that the application process for the refinanced mortgage will also include fees and charges such as establishment fees, valuation fees, and possibly even LMI depending on the amount of equity you have in your home.

Do your sums, and talk to an expert, such as your accountant or broker, if you’re not sure.

 

Common scenarios for refinancing your mortgage

There are various circumstances where you might look at your current mortgage and consider refinancing or switching to a new loan and lender:

  • Save money: By far, the biggest reason to refinance is to access a more attractive interest rate on your loan.
  • Reduce your mortgage term: Getting a better interest rate, while maintaining the same level of mortgage repayments, means your loan can be paid off sooner.
  • Access equity in your home: Refinancing your mortgage is a great way to access the equity you have in your home. You may want to renovate, purchase an investment property or even buy a new car. Refinancing can enable you to do this.
  • Consolidate debt: You may have a couple of high-interest credit cards or an urgent tax bill that requires payment. Refinancing your mortgage can provide you with access to funds to pay debts.
  • More suitable loan: Refinancing your mortgage provides an opportunity to secure a mortgage with enhanced features such as 100% offset accounts, fixed or variable rates (or a combination of the two), or a line of credit.

Also, keep in mind that your financial circumstances may have changed since you initially took out your mortgage loan. For example, you may have paid down and cancelled credit cards or paid off some debt, and this may have helped lift your credit score, thus opening up access to better interest rates than may have been available to you previously.

 

The benefits of refinancing your mortgage

Your mortgage is likely to be the largest single expense in your household budget, so it pays to ensure it best matches your needs – which can change significantly during a mortgage term. As your financial situation improves, or even if you find yourself in some short-term financial difficulty, it can be very worthwhile to consider your options and secure a more appropriate mortgage loan.

For example, the COVID-19 pandemic has coincided with record low-interest rates. Many people have refinanced their mortgages throughout this time to take advantage of lower interest costs or access equity in their homes for various purposes, such as renovating to improve their work-from-home set-up.

And for mortgages that were established years or even decades earlier, there is a wide range of more flexible and suitable mortgage products available from a new breed of lenders beyond the big banks, offering more attractive terms and conditions that can better reflect your individual circumstances.

 

5 things to consider before refinancing your mortgage

There are many good reasons why you might consider refinancing your mortgage and some potentially significant benefits from doing so. Before you go ahead, consider these five factors:

  1. Interest rates: Check current interest rates offered by different lenders and compare them to your current mortgage rate.
  2. Your equity: Determine the equity you have in your property (based on its current estimated value) – you generally need at least 20% to avoid LMI if you refinance.
  3. Refinance costs: Work out the costs of discharging your current loan (break costs and fees) and the costs associated with obtaining a new loan (application, valuation and establishment costs and fees).
  4. Your credit rating: Applying to refinancing your mortgage is considered a credit application, and if you apply and are rejected, it could negatively affect your credit score.
  5. Why you want to refinance: What is the reason you want to refinance your mortgage? Is it to get a better interest rate, access equity in your home, debt consolidation, or more flexible and suitable loan terms? This will help you decide which loan will best suit your particular circumstances.

 

Key takeaways

A mortgage is a big financial commitment, generally over a long period. It is worth reviewing your mortgage every few years to make sure it suits your needs and reflects current interest rates.

 

WHAT ARE SHORT-TERM LOANS AND HOW DO THEY HELP A SMALL BUSINESS?

In this article, we’ll look at short-term business loans – what they are, why you might use them, their various benefits, the loan options available, how they work, and the difference between secured and unsecured loans.

 

What is a short-term business loan?

As the name suggests, a short-term business loan is a loan taken out for business purposes. When we say ‘short-term,’ we generally mean for a period of time anywhere from two months to two years. Unlike longer-term loans, that are often up to 25 years and traditionally used to purchase commercial or industrial property, or investment in income-producing equipment (such as a factory fit-out), short-term loans are typically used to smooth out business cash flow gaps over a relatively short period of time. Short-term loan amounts are also comparably smaller to long-term loans, and are usually within a range of $25,000 to $500,000+.

 

Why you might consider a short-term loan for your business

A short-term loan can help smooth out the ups and downs of business cash flow.

Anyone who has run a business of any size understands the difficulties of managing cash flow fluctuations or dealing with cash flow gaps; or the frustration of missed opportunities simply because funds were not available to take advantage of them at the time. This can be particularly difficult for small businesses that are reliant on payments from fewer (larger) debtors, seasonal trade, or lack of ‘buffer’ funds to meet unexpected expenses.

One of the most common uses for a short-term business loan is to manage seasonal fluctuations in trade and cash flow. For example, suppose a business does a greater share of revenue in the summer months (such as a tourism operator) or at Christmas (such as a giftware retailer). In these cases, a short-term business loan can be a handy way to balance cash flow through the leaner months or to purchase stock in the lead-up to a buying period.

 

How can you use a short-term business loan?

There are many potential uses for a short-term business loan. Here are some common scenarios:

  • Purchase new stock
  • Purchase new equipment
  • Make essential repairs to business equipment
  • Make wage payments
  • Hire new staff for an upcoming busy period
  • Offset slow-paying customers
  • Pay outstanding tax bills
  • Fulfil a new contract
  • Smooth out time lags between accounts receivable and accounts payable
  • Start a business
  • Invest in an established business or buy an existing business

 

The benefits of a short-term loan for a small business

When cash flow is tight, or there is a crunch looming, timing is often of the essence. The key benefits of short-term loans for small businesses are that you can easily apply online, get approved and funded quickly compared to other types of loans. While lenders’ turnaround times vary, short-term business loans can typically be obtained within three to five days, and often without extensive documentation. A short-term business loan is also the perfect solution for a short-term cash flow gap where the funds are not required for more than a few months.

Where can you get a short-term business loan?

You can apply online with a variety of lenders, from the big banks to new and emerging fintechs and private lenders. The good news for businesses, especially for small businesses, is the emergence of specialist short-term lenders, who are making business lending more accessible and competitive than ever before.

 

What short-term loan options are there for small businesses?

Short-term business loans come in a variety of different forms. The type that is most aligned with your business will depend on your specific circumstances and requirements. Here’s a few areas to consider:

  • Term loan: A single lump sum to be repaid over an agreed period of time with a variable or fixed interest rate.
  • Business overdraft: A pre-approved facility attached to your business bank account that you can draw down from time to time as required.
  • Line of credit: Similar to an overdraft, but not attached to a specific bank account.
  • Business credit cards: For smaller amounts, these are convenient but attract a very high rate of interest if balances are not paid in full each month.
  • Equipment or vehicle leases: Funds for the purchase of specific equipment or vehicles, paid in monthly installments (often with a lump sum payment at the end of the lease term).
  • Invoice financing: Also known as debtor finance or invoice discounting, current invoices are paid to the business by the lender, less an agreed percentage fee, with the lender collecting the full invoice payment from customers.

 

Short-term business loan facts

Short-term business loan facts and figures depend entirely on the lender. Here’s a product overview from specialist short-term business loan provider, Mango Credit:

  • Loan amounts can be $25,000 to $500,000+
  • Loan terms from two months to two years+
  • Funding typically within three to five days from application
  • No credit check or income assessment
  • Minimal documentation
  • Security can be provided by real estate assets
  • Secured by caveat, second or first mortgage
  • Flexible underwriting

 

The difference between secured and unsecured business loans

One key factor when applying for a short-term business loan will be whether the loan is secured, or unsecured.

A secured loan requires security – typically in the form of relatively liquid assets that a lender can sell to recover the loan funds in the event of a payment default. Think property, inventory, accounts receivable, vehicles and equipment and any other type of asset the business owns (note that a loan may also be secured against the personal assets of a business owner, such as a home).

Secured loans generally take longer to approve as the security needs to be considered and valued, requiring valuations and further documentation. A couple of key benefits of a secured loan are that they commonly allow larger amounts to be borrowed and charge lower interest rates based on the lower risk.

Unsecured loans differ in a few key ways. Rather than physical assets as security, the loan may be approved on the basis of your strong business cash flows that demonstrate a robust capacity to pay down the loan and interest. Generally, they will be for smaller amounts than secured loans and they attract a higher rate of interest as they are riskier loans for lenders. But unsecured loans do offer the benefit of faster approval as they require less upfront information and documentation.

 

What short-term business loan is right for you?

The most aligned loan for your business will depend on entirely on your specific situation and circumstances. Questions to ask yourself and discuss with your lender include:

  • What the loan is for
  • How much you need to borrow
  • How long you need the funds (or how soon you can pay back the loan)
  • What repayment amount can you afford
  • What you have to offer as security
  • What happens if you’d like to pay out the loan early
  • What happens if you’re late with payment(s)

 

Key takeaways

If you are facing a cash flow shortfall in your business, or need funds to grow your business or make an investment, a short-term business loan can be used for a variety of purposes. You can apply online for short-term loans from a variety of lenders, with private lenders and fintechs offering a relatively simple application process, minimal documentation and fast funding.

 

 

101 Guide On Bridging Loans Available In Australia

In this article, we’ll cover everything you need to know about bridging loans – what they are, how they work, when you might consider one, the benefits of using them and common eligibility criteria.

What is a short-term bridging loan?
Increasingly popular in Australia, and available from a variety of lenders, short-term bridging loans help you ‘bridge the gap’ between buying a new home and selling your current home. There are other circumstances where you might consider a short-term bridging loan which we’ll cover later.

Short-term in nature, these loans are typically for six to 12 months’ duration, and usually range from $25,000 to $500,000, depending on the lender and your circumstances. In Australia, you can often apply online for a bridging loan. Private lenders, in particular, are known for offering a simple application process, minimal documentation and fast funding (usually within three to five days after applying).

How does a bridging loan work?
The best way to explain how short-term bridging loans work is to use an example.

Say you own a property worth $800,000, with an existing mortgage of $400,000. In this case, you have 50% equity that you can use to go toward purchasing a new home. You find your new home, and it is going to cost $1 million. But you are yet to even list your current home for sale.

To avoid a potentially costly rushed sale of your current home, you take out a bridging loan to buy the new home, adding $1 million to your current loan balance. So, you now have total borrowings of $1.4 million. You then put your current home on the market, sell it in say three months for $800,000, and pay down the combined loan, leaving an ongoing balance or ‘end debt’ of $600,000.

For simplicity, we haven’t mentioned purchase or selling costs in this example. Generally, you need to allow around 5% to cover purchase costs, such as stamp duty, and 2-3% to cover selling costs, such as agent fees.

Features of a bridging loan
In the above example, for three months you have a combined loan debt of $1.4 million. While this might seem daunting, one of the key features of a short-term bridging loan is that during the bridging term the additional loan amount is interest-only.

Furthermore, many lenders will allow the interest to be capitalised, meaning it gets added to the loan, to be repaid at the end of the loan, when your current home is sold. This helps to avoid financial stress on the combined loan balance. In other words, during the bridging term, you continue to pay the principal and interest on your initial mortgage (in this case $400,000). The bridging loan interest on the additional $1 million is then paid with the proceeds from the sale of your current home.

When you do the numbers, you’ll find the cost of a short-term bridging loan can be favourable compared to the costs of renting if you sell before you buy, storage costs, or the costs of moving home twice. Not to mention avoiding the stress of all that!

Of course, if you have the capacity to pay more during the bridging term.

When might you consider a short-term bridging loan?
The most obvious use of a short-term bridging loan is to help to manage the sometimes tricky juggling act of purchasing a new home before your current home is sold. In this case, it’s all about the timing and if you don’t get it right, you might miss out on purchasing your dream home, or be forced to rush the sale of your current home.

Beyond this scenario, there are other uses of bridging finance that can help you get access to funds for a short period of time prior to selling a property. These include:
• Funding renovations to prepare your property for sale
• Completing a small land subdivision or duplex that will be sold on completion
• Securing a deposit for a new property (principal place of residence or investment property)
• Assistance with costs such as moving, medical, legal or living expenses
• Payment of a personal bill or debt (such as a tax debt) that needs to occur immediately
• Downsizing your home

Common to all these scenarios is a pending property sale that will allow you to discharge some or all of the total borrowed funds within a relatively short timeframe.

The main benefits of a short-term bridging loan
Short-term bridging loan have several benefits including:
Buy now and sell later: You don’t have to watch your dream home pass you by while you try to sell your current home.
Unrushed sale of your current home: With a bit of breathing space, you’ll avoid the potential loss that can occur with a rushed or forced sale of your current home.
Don’t move twice: Renting a home (and maybe storage space) after you sell a home and before you buy a new home, and moving twice, is costly and stressful.
Capitalised interest payments: Many lenders allow interest to be capitalised and paid once your home is sold (meaning you don’t make payments throughout the loan period).
Standard interest rates: Some lenders charge higher interest for bridging loans, but the good news is there are many lenders who charge standard variable interest rates on this type of loan.
Make additional payments: If you have the capacity to pay principal and interest on the combined loan during the bridging period, you can reduce interest costs.

What type of bridging loans are available?
There are effectively two types of bridging loans, determined by the status of the sale of your current home:
Closed bridging loan: This loan type is ideal for when you have exchanged contracts at an agreed price and agreed settlement date. This loan structure provides more certainty for the lender and is considered less risky as exchanged property sales rarely fail to settle.
Open bridging loan: This type of loan is needed if you have found your new home, but are yet to put your existing home on the market. This is a riskier proposition for both you and the lender, so be prepared to answer more questions.

How do you qualify for a bridging loan?
As is always the case when it comes to property loans, the equity you have in your current home is the key factor in your eligibility for a short-term bridging loan, as well as the amount you can borrow. As a general rule of thumb, lenders will be looking for at least 50% equity in your current home to qualify for a bridging loan.

There are many lenders to choose from, given the increased popularity of short-term bridging loans. Besides the traditional big banks, a growing number of non-bank lenders, private lenders and fintechs offer bridging loans. In Australia, you can apply online for a short-term bridging loan from a range of lenders.

While interest for the bridging period can be capitalised, your capacity to repay the ‘end debt’ or ongoing mortgage will also be taken into consideration.

Key takeaways
Buying a new home and selling your current home can be very stressful. Acquiring a short-term bridging loan is one way to reduce stress whilst allowing you to secure your new home, before you sell your current home. We’re spoilt for choice, with many lenders all offering short-term bridging loans for a variety of purposes.

7 STEPS WHEN BUYING YOUR FIRST HOME

In this article, we’ll look at the essential steps first home buyers should take to secure their new home, to include working out a budget, organising a home loan, taking advantage of the First Home Buyer Grant, and more.

 

Buying your first home?

Buying your first home, the ‘Great Australian Dream’, is a very exciting time. But it can also be daunting as there’s so many things that need to be considered. This ‘7 Steps to Buying Your First Home’ guide has been developed to help make the process a bit less overwhelming. Here’s an overview of what should be on your radar:

 

Step 1: What is your budget?

There are a few areas to think through when it comes to how much you can spend on your new home, and how much you can afford to repay on a home loan, to include:

  • Your household budget: This is your total household after-tax income (including you and or your partner), and any investment income you may earn. Then you must calculate ALL your total living expenses, including groceries, dining out, entertainment, the cost of running your car(s), gym membership and even your Netflix subscription. Use a spreadsheet or find an online calculator from a lender to help with this. The difference between your after-tax income and living expenses is how much you can put toward your home loan. Tip: be sure to leave some ‘rainy day’ contingency plan money to make sure you’re not completely stretched in the event of an unforeseen circumstance, such as a redundancy or unexpected medical expense.
  • Your savings or deposit: How much do you have for a deposit? This is a major factor in calculating how much you can spend on a home, with most lenders looking for at least a 20% deposit. With than less than 20% deposit, you will often need to pay Lenders Mortgage Insurance (LMI), which can cost thousands of dollars. If you are like around half of all first home buyers in Australia, you may be able to lean on the ‘Bank of Mum and Dad’ for some help with your deposit.
  • Don’t forget stamp duty: All states in Australia charge stamp duty (the cost to transfer the property into your name). This is generally calculated using a sliding scale based on purchase price and can add around 4% to your purchase cost.
  • First Home Buyer Grant: There is a range of schemes and grants available to first home buyers from both the Federal and State Governments (note these differ between states). The First Home Loan Deposit Scheme (FHLDS) is an initiative of the Australian Government to support eligible first home buyers build or purchase a home sooner. This scheme allows for a smaller deposit (say 5%) with the Government guaranteeing the difference up to 15% to help borrowers avoid LMI. In NSW, for example, you may be eligible for a $10,000 grant to build a new home, or a variety of concessions to build new homes or purchase existing homes. Full details on grants, concessions and how to apply in NSW are here.

 

Step 2: Find the right home loan

There are many types of lenders that provide home loans (otherwise known as first mortgages). Besides the traditional big banks, there are new non-bank lenders, private lenders and fintechs, such as Mango Credit who all offer mortgage products.

 

Here are a few tips for first home buyers to keep in mind when considering a lender:

  • Get your finances in order: You need all your paperwork handy and in good order, including current payslips, last two year’s tax returns, six months of bank statements and details of any other loans (such as a car or personal loan) and credit cards.
  • Check your credit score: A ‘credit score’ is a number between 300–850 that depicts a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders. A credit score is based on credit history: number of open accounts, total levels of debt, and repayment history, and other factors. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner. What this means in real terms is that the higher the credit score, the more options you’ll have available to you (and the cheaper the interest rate will be).
  • Your capacity to pay: Your after-tax income, less living expenses, will tell you how much you can afford to pay on a mortgage. It is prudent to consider the impact of interest rate increases, and if you can afford to meet your repayments if rates rise. If your capacity to cover rate rises is limited, consider fixing the interest rate for all or part of your loan.
  • Shop around: Don’t just talk to your current financial institution or bank. You can talk to a broker or look online to compare the products, rates and fees of a large number of lenders that include the traditional big banks, but also a growing range of non-bank lenders, private lenders and fintechs who all offer mortgage products for first home buyers.

 

Step 3: Find your new home

This is the fun part, but it can also be a lot of legwork… Here, the internet is your friend and can give you a good idea of the price guides of homes in areas you are interested in, as well as previous sales in these areas. Try Domain or realestate.com.au, the two largest real estate sites in Australia.

 

Nothing beats seeing a home in person, so once you have a shortlist of homes in the areas you like and within your price range, attend open homes to inspect the ones you are interested in.

 

You can also let real estate agents in your preferred suburbs know that you are actively looking, what you are looking for, and your price range. Ask the agent to let you know about new listings and even off-market properties they have on their books.

 

Step 4: Have a closer look

Don’t commit to purchase a home before you look under the covers (or more accurately, behind the walls). It’s critical to conduct thorough professional inspections prior to purchasing a home, to include pest and building/ electrical inspections. For any strata purchases, it’s wise to request strata minutes from the last few years to ensure there are no major problems in the building. This will cost money, but will ensure no nasty surprises after you buy. And if you find urgent repairs are needed, or there are larger structural issues, you can factor this into the purchase price and your offer, or walk away.

 

Step 5: Make an offer

Most homes are offered either by private sale or treaty, or they go to auction. Typically, they are sold via a real estate agent, but some vendors sell directly. Once you know this is the home you want, make an offer within your budget. Be careful with so-called price guides provided by agents, particularly in a ‘hot’ property market. Often, they are less than what the vendor really wants or hopes to achieve at auction, so your initial offer may be unsuccessful.

 

Note that private treaty sales have a cooling-off period for inspections etc., but auctions don’t usually provide this option. So, it is crucial if you are bidding at an auction to have pre-approved finance and have done all the necessary inspections.

 

You may consider engaging a buyers’ agent to help you with the negotiation process, or even to bid on your behalf at auction. While it costs money to engage a buyer’s agent, they can also save you time, stress and potentially tens of thousands of dollars by securing a better price than you might have on your own.

 

Once your offer is accepted, contracts will be exchanged, and a deposit (usually 10% of the purchase price) will be paid into a trust account.

Step 6: Over to the lawyers

Property contracts are large documents full of ‘legalese.’ That’s why there are many specialist conveyancing firms that work solely in the area of property. You will also find many suburban law firms that offer a range of legal services, including conveyancing. This investment ensures there are no surprises once you have completed the purchase process.

 

Typically, the process from contract exchange to settlement is six weeks, but the timing can be negotiated between you and the vendor. During this time, your conveyancing solicitor will liaise with the vendor’s solicitor, council and various government departments to ‘tick all the boxes’ and support a smooth transfer of ownership to you.

 

Step 7: Settlement and time to celebrate!

On settlement day, and in exchange for the purchase price less the deposit you have already paid, you receive the title and keys to your new home. Congratulations, you are now a proud home owner! All that remains is for you to move in and turn your new house into a home.

 

Key takeaways

Buying your first home is a huge commitment. If you understand the steps involved, and have considered all the important factors, the process will hopefully be faster, less stressful and a lot more enjoyable. Good luck!

WHY A SECOND MORTGAGE MAY BE YOUR FIRST CHOICE

In this article, we’ll look at short-term second mortgages – what they are, how they work, how you might use them, their benefits, and what to consider when you are applying for one.

 

What is a second mortgage?

When you have equity in your property and need access to funds quickly, a short-term second mortgage can be a good option in the absence of not being able to extend or refinance your first mortgage.

A second mortgage is essentially a second loan that’s in addition to the primary (first) mortgage, secured against your property. Also known as a second lien, or secondary registered interest, it uses the equity you have in your property and, once established, means you will have two mortgages against your property.

Traditionally, second mortgages were like first mortgages, in that they were for very long periods of time (sometimes decades). However, in Australia, the rise of non-bank and private lenders has opened up the options for borrowers – in particular, offering short-term second mortgages that typically have a term from two-to-36 months. Short-term second mortgages are an increasingly popular alternative for both personal and business funding requirements.

For mortgage providers, a second mortgage means they are second in line to be paid, after the first mortgage is paid, so their risk is somewhat larger. This can be an important factor in being approved for a second mortgage, and the cost (interest rate) applicable to the loan.

 

How does a second mortgage work?

A second mortgage is very similar to a first mortgage, in that it is secured against your property. Importantly, mortgage providers will consider the total loan-to-value ratio (LVR) of both the primary and secondary mortgages in evaluating the loan for approval.

Second mortgages tap into the equity that you have in your property. This will increase over time as you make payments and reduce the principal, and/ or with increases in the property value. This additional equity can then be ‘released’ via a second mortgage loan.

You can apply online for a second mortgage with a range of lenders, and once approved, the loan may take the form of a lump sum (one-time loan) or a line of credit (available to be drawn upon as the need arises).

 

When you may consider a short-term second mortgage

There are a variety of reasons why you might consider a short-term second mortgage to access funds for a limited period. These include:

  • Renovations: If you are planning on selling your property, a short-term second mortgage can provide funds to make improvements to your home that can be quickly released upon the sale of the home (i.e. the first and second mortgages are paid out once the property has sold).
  • ‘Bridging the gap’: A short-term second mortgage is commonly used to ‘bridge the gap’ between the purchase of one property and the sale of another, when the settlement timings don’t quite match up.
  • Investment property: You can access the equity in your property to purchase another property, using a short-term second mortgage to fund the deposit and/ or purchase.
  • Debt consolidation: A short-term second mortgage with a lower interest rate is often used to pay off personal loans, credit card debts, or even a large medical or tax bill.
  • Business use: Standard business loans typically attract a higher rate of interest than a loan secured by property, so a short-term second mortgage is regularly considered when short-term funds are required to boost business cash flow or working capital (for example, to pay suppliers and wages, purchase stock/ equipment or ‘even out’ invoice lags).

 

The benefits of second mortgage loans

If you have solid equity in your property, and need access to additional funds relatively quickly for short-term personal or business use, there are a range of benefits to choosing a short-term second mortgage:

  • Large loan amount: You can often access large loan amounts with a short-term mortgage as they’re secured by property (which mortgage providers consider the ‘safest’ type of guarantee). The amount you can borrow depends on the amount of equity you have in your property.
  • Lower rate of interest: A short-term second mortgage typically has a lower rate of interest in comparison to alternatives such as caveat loans or unsecured personal loans.
  • Higher LVR: Short-term second mortgages usually have a higher loan-to-value ratios (LVR), which means you can borrow a larger loan amount.
  • Fast access to funds for a variety of uses: A short-term second mortgage loans allow you to access the equity you have built up in your property relatively quickly for personal use (such as renovations to prepare your property for sale), or if you have a time-sensitive business opportunity or requirement (such as purchasing another business or boosting working capital).

 

If you have equity in your property and need short-term funds for personal or business use, Mango Credit makes it easy to apply online for a short-term second mortgage.

 

What to consider when applying for a short-term second mortgage

While there are many benefits to using a second mortgage for access to short-term funds, there are some important areas that should be investigated before applying for a loan, to include:

  • Equity: How much equity you have and what the total LVR will be once you have two mortgages secured against your property.
  • Application process: Your first mortgage lender will need to approve the registration of a second mortgage on the title of your property. The application process is a little more complex than for, say, a caveat loan, as the lender needs to value the property and run credit checks. There may also be fees associated with the application process.
  • Interest: Adding a significant loan amount to your first mortgage will mean you are paying additional interest.

 

Key takeaway

When you have equity in your property and need access to funds quickly, a short-term second mortgage can be a good option in the absence of not being able to extend or refinance your first mortgage. You can apply online through an increasing number of mortgage providers, including non-bank and private lenders, to access to funds that can be used for a variety of personal or business uses.

 

Short-term lenders offer long-lasting benefits

Speed, flexibility, and streamlined processes are just a few of the benefits of short-term lenders. Yanis Derums from leading private lender Mango Credit, speaks with Australian Broker about their range of short-term funding solutions for personal or business purposes. Read more >

FOUND YOUR DREAM HOME BEFORE SELLING YOUR CURRENT PLACE?

How to overcome funding glitches with a short-term bridging loan

 

In this article, you will discover how a bridging loan can be a fast and easy way to ‘bridge the gap’ between the purchase of a new home and sale of your current home.

A short-term bridging loan can help you to manage the potentially tricky scenario of purchasing a new home whilst simultaneously trying to sell your current home. If you don’t get the timing just right, you might be faced with the prospect of missing the settlement deadline on your new home, or feeling pressured to sell your current home for a lower-than-expected price due to time sensitivities.

 

What is a short-term bridging loan?

In simple terms, a short-term bridging loan helps ‘bridge the gap’ between the purchase of your new home and the sale of your current home. The good news is there’s a variety of short-term bridging loan providers in Australia, and you can easily apply for bridging loans online.

 

How does a short-term bridging loan work?

A bridging loan is a short-term loan that can be taken out on top of your current home loan until the property is sold. Typically, short-term bridging loans are for up to 12 months and range from $25,000 – $500,000, pending on the lender and your personal circumstances. You can apply for bridging loans online from a variety of lenders, with private lenders offering a relatively simple application process, minimal documentation and fast funding (usually within three to five days from application).

 

When a short-term bridging loan can help

Consider the situation where you find your new home, but have not yet even put your current home on the market. In this common scenario, a short-term bridging loan means you can complete the purchase, and then sell your current home in a more relaxed manner – ensuring you don’t have to settle for a ‘fire sale’ price.

 

What are the benefits of a short-term bridging loan?

Short-term bridging loans have some key benefits, to include:

  • Being able to purchase a new home when you find it – not after you sell your current place.
  • Avoiding a rushed sale, and potentially a lower sale price, of your current home due to time pressures.
  • Avoiding the rental and storage costs often incurred after the sale of your current home, whilst you find your new property.
  • Removing a lot of stress associated with buying and selling at the same time.

It’s also good to keep in mind that a short-term bridging loan can provide a cashflow injection for personal use when:

  • You want to renovate or prepare your property prior to sale
  • You’d like to complete a small land subdivision or duplex intended for sale
  • You need a deposit for a new property (investment or principal place of residence)
  • You require help with moving, living, legal or medical costs
  • You’re seeking to pay a personal bill or debt that can’t wait until the property is sold
  • You’re downsizing

 

Key takeaway

A short-term bridging loan is a very fast and easy way to access cash via equity in your home through the sale period. It avoids the pressure of not being able to purchase your dream home when you find it, or conversely a rushed sale of your existing property.