How Bridging Loans Can Work for Your Homeownership in Northern Beaches

When you're buying a new home in Northern Beaches, Sydney, but haven't yet sold your current property, a bridging loan can be a real lifesaver. 

This type of financing is designed to bridge the gap between the sale of your existing home and the purchase of a new one, ensuring you don't miss out on your dream property. 

Navigating the intricacies of bridging loans can be challenging, especially with the unique property market dynamics in Northern Beaches. That's where aknowledgeable broker comes in—they can guide you through the complexities, negotiate competitive rates, and tailor the loan to suit your specific needs. 

Ready to dive into the details? Let's explore how bridging loans work and why they might be the perfect solution for Northern Beaches homeowners.

What Are Bridging Loans?

Bridging loans are short-term loans designed to help you purchase a new property before your existing one sells. These loans "bridge" the financial gap, giving you the funds needed to buy your next home without waiting for the sale of your current property.

In the Northern Beaches, where the property market moves quickly, bridging finance can provide the breathing space needed to secure your dream home.

How Do Bridging Loans Work?

When you apply for a bridging loan, the lender will assess the value of both your current property and the one you're purchasing. The loan amount typically covers the purchase price of your new home plus the remaining balance on your current mortgage. This combined amount is often referred to as your "peak debt."

During the bridging period, you’ll be making monthly repayments on both your existing mortgage and the bridging loan. The good news? Most lenders only require you to pay interest on the bridging loan during this period.

Once your original property is sold, the sale proceeds will be used to pay off the peak debt, leaving you with a new mortgage on your new home.

Here’s a sample computation breakdown of how it works:

Scenario:

• Current Home Value: $1,200,000
• Remaining Mortgage on Current Home: $400,000
• New Home Purchase Price: $1,500,000
• Expected Sale Price of Current Home: $1,200,000

Bridging Loan Calculation:

1. Peak Debt (Total Outstanding Debt during the bridging period):

• Remaining Mortgage on Current Home: $400,000
• New Home Purchase Price: $1,500,000
• Peak Debt: $400,000 + $1,500,000 = $1,900,000

2. Bridging Loan:

• Expected Sale Price of Current Home: $1,200,000
• Bridging Loan Amount: $1,900,000 (Peak Debt) - $1,200,000 = $700,000

In this case, the bridging loan of $700,000 is what covers the gap between your Peak Debt and the expected proceeds from the sale of your current home. During the bridging period, you typically make interest-only payments on this $700,000 loan.

Once your current home is sold, the proceeds ($1,200,000) are used to pay off the remaining $400,000 mortgage, and the balance reduces your bridging loan.

Final Loan After Sale:

• Bridging Loan After Sale: $700,000 - $400,000 = $300,000
• New Mortgage Amount on New Home: $300,000

This example illustrates how a bridging loan can help you manage the Peak Debt involved in purchasing a new home while waiting for your current property to sell, offering flexibility in the competitive Northern Beaches property market.

Types of Bridging Loans

Bridging loans generally come in two forms: closed bridging loans and open bridging loans.

• Closed Bridging Loans: These loans have a fixed end date, usually aligned with the settlement period of your current property. They’re ideal when you’ve already exchanged contracts on your property sale and know exactly when the funds will be available.
• Open Bridging Loans: Open bridging loans don't have a fixed repayment date. They offer more flexibility but are often more expensive and require a clear exit strategy, such as a planned property sale within a certain time frame.

Benefit of Utilising Bridging Loans

When considering your options for purchasing a new property while still holding onto your current one, bridging loans can offer significant advantages over traditional loans. These benefits make them an attractive option for many homeowners and investors. Let's explore five key benefits of utilising bridging loans:

1. Seamless Transition Between Properties

One of the primary benefits of bridge loans is the ability to purchase your new property without waiting to sell your current home. This means you can secure your new home without making the purchase contract subject to sale of your existing property.

By doing so, you can avoid the risk of losing your dream home in a competitive market. Additionally, bridging loans can cover stamp duty and other initial costs, making the transition smoother.

2. Flexibility in Loan Repayment

Bridging loans offer flexible loan repayment options, which is a significant advantage. You can often make regular repayments or opt for interest-only payments during the bridging period.

This flexibility can be crucial in managing your finances, especially when you're juggling the costs of a new home and your current home loan. With extra time provided by these loans, you can sell your current property at the best possible price without rushing.

3. No Need to Rush Your Sale

With a bridging loan, you get the extra time you need to sell your current property, allowing you to avoid the pressure of quick sales. This is particularly beneficial in ensuring you get a fair market value during property valuations. The ability to wait for the right buyer can help maximise your loan balance after the sale, reducing the ongoing loan on your new property.

4. Tailored Loan Types and Costs

Bridging loans come in various loan types, including short-term bridging loans and longer-term options, depending on your needs. A loan specialist can help tailor a secured loan that suits your specific situation, whether it involves a charge loan on your existing property or a secured loan against both properties.

Additionally, while the loan cost might be higher than rate home loans, the ability to secure your next property without delay often outweighs the cost considerations.

5. Maintaining Financial Stability

Finally, bridging loans can help maintain your financial stability during the transition period. By covering the ongoing loan payments and managing the loan balance efficiently, you can avoid the financial strain that might come with holding two properties at once.

The initial loan structure allows you to manage both your current and new properties without overwhelming your finances, ensuring you stay on top of all loan payments.

Why Consider Bridging Finance in Northern Beaches?

Northern Beaches, Sydney, is a highly sought-after area known for its stunning coastline, relaxed lifestyle, and vibrant community. It’s an ideal location for homeownership and investment, with top-notch schools, thriving businesses, and quick access to Sydney’s CBD.

As of mid-2024, the property market in Northern Beaches remains strong. The median house price is around $2.5 million, while units average $1.1 million. This ongoing demand, paired with limited supply, means properties often sell quickly.

Bridging finance can be a crucial tool in such a competitive market. It allows you to secure a new home before selling your current one, ensuring you don’t miss out on opportunities. With property values steadily increasing, especially in Northern Beaches, bridging loans provide the flexibility to act fast, making it easier to transition into your new home without the stress of immediate sales.

Source: CoreLogic

Key Considerations for Bridging Loans

While bridging loans offer significant advantages, they’re not without their challenges. Here are some important factors to consider:

• Interest Rates: Bridging loans typically come with higher interest rates compared to traditional home loans. The interest is often charged on a variable rate, which means your monthly repayments could increase if rates rise.
• Loan Term: Bridging loans are short-term by nature, with most lenders offering terms from 6-12 months. It's crucial to have a clear exit strategy, such as selling your current property within this period.
• Additional Costs: Be prepared for extra costs like valuation fees, set-up fees, and exit fees. These can add up, so factor them into your financial planning.
• Credit Score: Lenders will consider your credit history when assessing your loan application. A good credit score can help secure a more favourable interest rate.
• Repayment Schedule: During the bridging period, you'll be paying interest on both your current mortgage and the bridging loan. Ensure you can comfortably manage these payments to avoid financial strain.

FAQs

What is the typical interest rate for bridging loans? 

Bridging loans often have higher interest rates than traditional home loans, generally ranging from 5% to 7% per annum. However, rates can vary based on your lender and credit score.

How long is the typical bridging loan period? 

Most bridging loans last between 6 to 12 months. It's essential to have a clear plan for selling your current property within this time frame to avoid additional costs.

Can I get a bridging loan with a bad credit score? 

While it’s possible, a lower credit score may result in higher interest rates or stricter loan terms. Consulting a mortgage broker can help you explore your options.

Are there any risks involved with bridging loans? 

Yes, the main risks include the potential for higher interest costs if your property doesn’t sell within the expected time frame and the possibility of paying two mortgages simultaneously.

What happens if my property doesn't sell within the bridging loan term? 

If your property doesn’t sell within the agreed term, you may need to negotiate an extension with your lender or consider refinancing options. Failure to sell could result in higher exit fees.

How much can I borrow with a bridging loan? 

The amount you can borrow depends on your lender, the value of your current and new properties, and your financial situation. Lenders usually allow borrowing up to 80% of the combined value of both properties.

Can bridging loans be used for investment properties? 

Yes, bridging loans can be used for both residential and investment properties. However, the terms and interest rates might differ based on the type of property and the lender’s policies.

Takeaway

Bridging loans can be an excellent solution for those looking to buy a new property in Northern Beaches without the pressure of selling their current home immediately. With the flexibility to manage loan repayments and the opportunity to take your time with the sale, bridging finance can provide peace of mind during what is often a busy period. 

If you’re considering making a move, now is the time to explore how bridging loans could work for you. For tailored advice and to find the right loan option, don't hesitate to get in touch with Mortgage Brokers Northern Beaches or call 0403 316 686. We're here to make your property journey as smooth as possible!