Why Bridging Loans Could Work for You?
Recently updated on February 21st, 2023 at 03:55 pm
A bridging loan, or a home bridge loan, is a short-term loan that is commonly used to fund new property purchases whilst selling your existing property. This type of finance is also often used for property renovations and repairs, auction purchases, debt consolidation or refinancing and other business purposes.
As you read on, you will see how bridging loans work, as well as the pros and cons of taking out this type of finance facility.
Bridging loan meaning
A bridging loan gives you the funding that you need for personal or business purposes. For example, you can use a bridging loan to buy a new home whilst you are still trying to sell your current home – even with an existing mortgage.
How does a bridging loan work in Australia?
You can get bridging loans from a range of trusted lenders in Australia. It’s important to select a reliable lender. A finance broker can help you navigate which lender and product best suits your circumstance.
The amount that you can borrow through a bridging loan highly depends on the equity you have in your property. In a nutshell, the more equity you have in your property, the more money you’re likely to be able to borrow.
Again, depending on the lender, interest may be charged monthly or alternatively, at the end of the loan (‘capitalised interest’). Once your property is sold, you can use the payment you received to pay your bridging loan.
The pros of a bridging loan
Here are some of the advantages of a bridging loan:
- Application is simple
Many lenders have an online application process. This means that you can apply online within a few minutes anytime, anywhere.
- Bridging Loans are flexible
Bridging loans are renowned for having flexible terms. Again, depending on the lender, this means you can customise your loan structure to suit your specific needs and repayment options.
- Fast approval and funding
A bridging loan is a quick way to obtain funding. Funding can often be received within days of application and approval.
- Bridging a loan saves you from renting
Many borrowers favour a bridging loan as it avoids the hassle of renting as it enables you to settle on your newly acquired property before selling your existing one.
- Bridging loans are multi-purpose
You can use bridging loans for a range of purposes, such as auction purchases, property renovations and repairs, debt consolidation and business expenses.
The cons of a bridging loan
Below are some disadvantages of a bridging loan:
- High interest
Bridging loans typically have higher interest rates than a mortgage from traditional lenders. This is due to associated lender risk and loan terms.
- Short term
Bridging loans usually have short repayment periods, which can put pressure on your finances if you are not able to sell the property quickly or find alternative funding.
- Loan cost
You usually will need to pay for valuation fees when obtaining a bridging loan, which may include the property you’re in as well as the property you’re considering buying. Lenders also have different fee structures, so be sure to understand what these are (including if you miss a loan repayment or want to exit the loan early).
As with all types of loans, there are some risks associated with bridging loans. When considering a bridging loan, be sure you clearly understand all loan terms. A finance broker and/ or your accountant can help with this process.
What are the requirements of a bridging loan?
A bridging loan usually requires minimal documentation and eligibility requirements – particularly if its from a non-bank, specialist or private lender.
Below are some areas to consider before applying for a bridging loan:
- Home equity
Generally speaking, the more loan equity you have, the higher amount you can borrow.
- Current property documents
You will need proof that you currently own a property that you want to sell or renovate or a business that you want to finance.
- End debt
Lenders will want to understand how you’re going to repay the debt (otherwise known as your ‘exit strategy’).
- Sale contract
Some lenders require a copy of a sale contract for your property on sale before approving your bridging loan application.
- Proof of income and your identification
Different lenders will require different levels of income verification for borrowers seeking a bridging loan. Typically non-bank, specialist or private lenders require less documentation than traditional lenders.
How to repay a bridging loan?
Broadly speaking there are two options for repaying your bridging loan. What you choose depends on the lender-borrower agreement.
The first option is regularly repaying the monthly interest whilst you are still waiting to incur revenue. In that way, you will have less to pay when the term ends.
The second repayment option is to have a specific date of payment down to its interest (such as when your current property is sold).
Should I get a bridging loan?
There’s no ‘one-size-fits-all’ response to this question. It’s wise to consult with your finance broker and/ or accountant to help determine if a bridging loan is right for you.
Here is a list of questions to ask yourself that can help you decide whether a bridging loan is worth pursuing:
- Do you understand how it works?
- Do you want to take advantage of its pros?
- Are you willing to take a risk of its cons?
- Can you fulfil the requirements and eligibility criteria?
A bridging loan can be a great way to access funds quickly and easily for a short-term requirement – such as purchasing a new property or to go toward business enhancements.
When it comes to bridging loans, consider reaching out to the established and reputable lender, Mango Mortgages.
Mango Mortgages is a leading provider of bridging loans and short-term business finances solutions in Australia. We pride ourselves to have an easy application process, competitive rates and flexible repayment.
Start your bridging loan application now. Reach out to Mango Mortgages today.