Bridging loan

What is a bridging loan?

Hi everyone it’s Heath from You&Me Personalised Property Services, with Matthew Stevens from Capita Finance Solutions. Thanks for joining me, Matt.

So today we’re getting chatty with Matty and we’ll talk about bridging loans and what they are obviously.

Matt gets these questions more than me, so let me explain what a bridging loan is, who uses them and how can you use them to your advantage.

Advantages of a bridging loan

Buy another property

A bridging loan really allows you to purchase a property while also maintaining your existing property. The best example would be if you have a family with kids and you don’t have anywhere to go but you’ve purchased your next property. The idea is that you can then move into that new property without having to sell your house first.

Use the equity of your existing property

So, you may need the funds in your existing property to purchase that new house. If you’ve got, let’s say, $200,000 worth of equity within your property and you need to use that $200,000 towards a new purchase for you to access that equity, you can use what’s called a bridging loan.

That’ll mean that the bank will purchase the new property for you and take on your existing debt, in your existing property, and then repay the current property’s debt once it sells.

Remove the “subject to sale” clause

Okay, so except the obvious, where you’ve got family, kids, you’ve got nowhere to move. I don’t know if you’re aware of that, but we have something in the real estate industry called “subject to sale”. Now, subject to sale means obviously that you put an offer in, they accept it, subject to the sale of your house and some terms and conditions around dates. Would a way around the subject to sale be just getting a bridging loan?

Absolutely. And that’s the biggest advantage of having a bridging loan, is that you remove that clause. And we all know that in this sort of market, especially in the last six months, which is probably why I’ve seen so many bridging loans come through. Whereas traditionally you wouldn’t because a finance clause like that is, is pretty standard as opposed to: “we need to remove this clause because if somebody sees a clause, they back over”.

Is ”subject to sale” the worst condition to have?

Yes, in a hot market, we give someone a subject a sale and someone else does cash and someone else does a finance subject to finance, the subject to sale is generally (there’s obviously ins and outs), but generally that’s the worst condition to have.

Disadvantages of a bridging loan

Are bridging loan’s rates higher?

Now, bridging loans sounds great but there’s got to be a disadvantage. Are the rates higher?

So the rates for and this is where we get into a little bit of terminology but we have what we call in debt and peak debt, right? So peak debt is your new purchase like a new mortgage, plus your existing mortgage. When they’re grouped together, it can be quite high. That, during the what they call the bridging period, which is for however long it takes to sell your house, you have effectively the charging period.

That’s how long you have that particular loan. The interest rate can be slightly higher for that. However, it is only for that period which is typically up to six months. This is where the bank will allow you to. However, in this market it might be three weeks.

In Perth, properties are still selling, hot off the press.

Pre-approval for a bridging loan

So, bridging loan. Great. No dramas. So when you’re talking about a bridging loan, would you still get a pre-approval for a bridging loan? Is that how it works?

Absolutely. So when you’re when you’re looking at a property, you can get pre-approval for you for your bridging facility. However, once you have your contract for the property you’re purchasing, it does activate that bridging facility. So you can get pre-approval, make sure that everything is above board. We get your existing home value to have somebody walk through it, make sure that the bank is happy with the value of that property, the equity that you have available in that.

And then that will tell us how much you have then to purchase for your next property.

Low income and high property equity

So I’ll throw a spanner in the works here, like I always do. We’ve got someone that doesn’t earn a lot of money, but the house has risen a gazillion dollars in the last two years. That just tells me that they’ve got a lot of equity in the house, but they’re not on the market yet. How did the bank see that?

Because obviously, if they were to go for a normal loan outside, that they wouldn’t get the loan. But now the House has $400,000 equity in it. How does the bank see that?

Good question!

And again, it comes back to pay debt, right? So if you’re getting a $500,000 mortgage and you have a $500,000 mortgage already, then you’d be looking at it $1,000,000 loan, which that person wouldn’t typically be able to get correct. The vast majority of banks that have a bridging loan product will look at that end debt only for servicing.

So there’s definitely advantages to using bridging loan even before using a subject to sell clause.

You may find that the interest rates are a little bit higher, but, you know, as long as you can facilitate that little bit of an interest rate rise for, let’s say, ten weeks, you’re pretty safe.

Some lenders allow no repayments

Well, the best part about it is that you don’t even need to make those repayments with some lenders. So what they’ll actually do is capitalize those repayments into a lump sum repayment once the house is sold. So you don’t actually need to make those repayments during that period.

That sounds pretty fantastic.

Criteria to get a bridging loan

Is a bridging loan harder to get?

The equity does need to be higher. So typically, that we’ll look at okay what’s our peak debt what’s the value of the two properties and make sure that it’s under 80%, some are 70%.

So they will have to be lower?

You need to have enough equity for it to be worthwhile. So if you’re right on the 80% mark on your existing property and you’re going right into the 80% mark on your purchasing property, you might be in a little but of hot water. But if you’ve got that gazillion dollar increase you talk about then, you shouldn’t have any trouble with the bridging loan.

Need more information?

Get in contact with us

Alright, there you have it. I’ve learned some stuff about bridging loans myself, so as always, it’s great to talk to you, great to suck some knowledge out.

But how can anyone get in contact with this? They want to know about not just bridging loans, but loans in general.

So you can just reach me email phone call on the details around this video.

Lovely guys, as always. It’s great to chat.

If you want any information of at all about property, come see us. Come have a chat. And until next time happy investing.