Bridging finance is a short term solution when wanting to purchase a new property before selling your existing property. This can also be a solution when building a new home and living in your existing home that you later intend on selling.
The lender, in most cases, takes over the mortgage on your existing property as well as financing the purchase of your new property. The two amounts totalled is what you call your “Peak Debt”. The peak debt includes the balance of your existing mortgage and 100% of the new debt including fees (as long as your not exceeding the LVR applicable).
The repayments are generally calculated on an interest only basis and in most cases the interest can be capitalised until the existing home is sold. This means that the repayments are added to the “peak debt”.
Once you sell the first home, the proceeds of the sale are used to paydown the peak debt. The remaining debt then becomes the “End Debt”, which is then repaid as a standard mortgage moving forward.
BRIDGING LOAN SCENARIO
Home 1 (Existing Home)
Balance Owed: $200,000.00 Value of Property: $600,000.00
Home 2 (New Purchase)
Purchase Price: $800,000.00 (including fees and charges)
Peak Debt= $1,000,000.00
You’re required to pay interest only on this amount until Home 1 sells, unless you’ve opted to capitalise the interest that accrues on the Peak Debt, then the debt will continue to increase until you either start making repayments or the sale of your existing property is completed
Home 1 Sells for $600,000.00
Let’s say you’ve been paying the interest payable and your peak debt remains at $1,000,000.00. If the net proceeds of the existing property (after agency fees etc) is $380,000.00 and you put that full amount towards the peak debt, you will be left with an end debt of $620,00.00.
From this point on, you’re left with a standard mortgage 😊