How does a bridging loan work?
26 Aug 2024
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Your borrower has found their dream home – it's everything they’ve been looking for, and it’s priced just right. However, they haven’t sold their current home yet, and it’s still tied up with a mortgage. So, how can you help them secure that new property before someone else does? A bridging loan can be a great solution.
So how does a bridging loan work, and what is a bridging loan exactly? In this article, we’ll break down everything you need to know about bridging loans, focusing on how they work, their benefits, and the features of Assetline Capital’s Clinch Bridging Loan.
What is a bridging loan?
Before we delve into the specifics of how a bridging loan works, it's important to understand what a bridging loan is.
A bridging loan is a short-term loan designed to provide financing during the period between buying a new property and selling your existing one.
This type of loan ‘bridges’ the financial gap, allowing you to purchase a new home without having to wait for your current property to sell.
Bridging loans are particularly popular among homebuyers who need quick access to funds, especially in a competitive housing market where opportunities can be fleeting.
How does a bridging loan work?
A bridging loan works by providing the borrower with the necessary funds to purchase their new property before their current property is sold. Here’s how it operates:
Loan size: The amount they can borrow with a bridging loan typically depends on the equity in their current property and the value of the new property. Assetline Capital offers bridging loans with maximum LVR of 75%.
Loan period: Bridging loans are usually short-term, with terms ranging from 3 to 12 months. This period is designed to give the borrower enough time to sell their existing property.
End debt: If the sale of their existing property does not fully cover the bridging loan, the remaining balance is referred to as the ‘end debt’. This amount is added to their new mortgage, which they will repay over the life of the new loan.
How Assetline Capital helped borrowers with a Clinch Bridging Loan
To show you how a bridging loan works in a real-world situation, let's explore a scenario where we successfully assisted borrowers in achieving their property goals with our Clinch Bridging Loan product:
The scenario
A couple in Sydney had been planning to sell their family home and downsize to a smaller townhouse. They were in the process of completing minor renovations and freshening up their property when they discovered the perfect townhouse they wanted to buy.
However, the townhouse was about to go to auction, and they needed bridging finance to secure the property quickly, giving them the confidence to move fast.
Our solution
We provided the borrowers with a Clinch Bridging Loan secured against both their family home and the new townhouse, offering a Loan-to-Value Ratio (LVR) of 75%. This loan allowed them to refinance their existing first mortgage, with enough cash out to complete the renovations and settle the purchase of the townhouse.
The key aspects of the loan included:
Loan Amount: $3,937,500
Security Value: $5,250,000
LVR: 75%
Loan Term: 6 months
Interest on the loan was capitalised and accrued at the 'peak debt' level for the six-month loan term. Once the family home was sold, the borrowers used the sale proceeds to pay down the bridging loan and refinanced the remaining 'end debt' into a long-term facility with a major bank.
Key deal features
Individual Borrower Loan: Tailored to their specific needs as an NCCP loan.
Serviceability: Testing was only required for the 'end debt' position, not the 'peak debt.'
Pre-Approval: The loan was pre-approved before the borrowers exchanged contracts on the townhouse.
Our Clinch Bridging Loan provided the couple with the flexibility and confidence to secure their new home while completing the sale of their existing property.
What are the pros of a bridging loan?
Understanding how a bridging loan works means recognising the benefits it can offer to you and your borrowers, particularly in a fast-moving property market:
Convenience: A bridging loan allows a borrower to buy a new property without waiting for their current one to sell, making the process much smoother and less stressful.
Quick access to funds: Bridging loans can be arranged quickly, providing the necessary funds when you need them most. At Assetline Capital, we provide conditional approval in under 24 hours*.
Avoiding temporary accommodation: By using a bridging loan, you can move directly into your new home without the need for temporary accommodation, which can save you both time and money.
Increased buying power: With the financial flexibility of a bridging loan, you may be in a better position to negotiate the purchase of your new property.
What are the features of a Clinch Bridging Loan?
We’ve designed our Clinch Bridging Loan to mitigate the typical setbacks and pitfalls that arise during the sale of a property.
Buyers are choosing bridging loans like Clinch because the product allows them to fully realise their potential, minus the fuss and compromise. Here’s what’s offered with Clinch:
Borrow $200k to $10m - accommodating a wide range of property transactions.
Maximum loan term of 12 months - giving borrowers ample time to sell their current property and comfortably settle the loan.
Up to 75% LVR on residential properties - ensuring borrowers can access the necessary funds based on the value of both their existing and new properties.
Metro and non-metro locations - flexibility no matter where the next property is located.
In addition to the above, our Clinch Bridging Loan also includes:
Interest capitalised and paid upon maturity - so there’s no need to make monthly interest payments during the loan term.
Serviceability testing of the "end debt" only - we assess the borrower’s ability to service the remaining balance after their current property is sold.
No early exit fees - flexibility to settle the loan early if the borrower manages to sell their property sooner than expected.
Sale requirement – the borrower’s outgoing property must be either sold or intended for sale for a clear path to repayment.
For more information about Assetline’s Clinch bridging loans, click here.
Final thoughts
Understanding how a bridging loan works is essential for Australian brokers navigating the property market.
With the right approach, a bridging loan could be the key to smoothly transitioning from one home to the next, helping your borrowers secure their dream property without unnecessary stress.
Assetline Capital’s General Manager of Distribution and Partnerships, Royden D’Vaz, spoke on our Clinch Bridging Loan in an article by The Adviser.
“With a Clinch Bridging Loan, every stage of the process happens when it’s supposed to. We get the deal done right. Our dedicated sales team across the country work alongside brokers and borrowers to smooth out processes and timelines through fast, flexible and effective lending solutions”.
*Approved applicants only. Terms and conditions and fees and charges apply. All applications are subject to lending and approval criteria.
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