In many cases, vendors (sellers) putting their homes on the market will be selling with the intention to purchase another property, or buyers may be waiting for completion of the sale of an existing property prior to buying a new one.
If there is a mortgage on either of the existing properties, things can get a little tricky if the sale of the existing property will not take place until after settlement of the new one. To ease the strain and allow completion of purchase for the new property, ‘bridging finance’ may be arranged.
Bridging finance allows you to obtain finance to ‘bridge’ the gap between having to pay for a new property and receiving the proceeds from the sale of your existing one.
What will normally happen is that a lender will take security over both properties until the sale of the existing one is complete. Usually the bridging amount or ‘peak debt’ will not be allowed to be above 80% of the value of both properties.
Some lenders will allow you to capitalise the interest payments (add them onto the loan) for a period of time or until the 80% limit is reached, to ease the financial burden on the borrowers. The bridging loan is usually separate from the lender’s normal products, and may be slightly more expensive, however the borrowers nominate which product their loan defaults to after the bridging period is over.
When you sell your existing property you just pay the proceeds from the sale off the balance on the bridging loan, and revert to your nominated loan product.
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