Bridging Finance: Please Explain

We've seen a house we want to put in an offer on.

Woohoo finally!

The only thing is that we haven't put our own house on the market yet so we will effectively have two loans at the same time for a while.

I THINK that should be OK. The house we own is worth around three times our current mortgage and the house we're looking to buy is approximately the gap (ie. what our current house is worth minus our mortgage).

We have savings that would cover the loan on both for about six months so that's fine but then we wouldn't have money for the deposit.

I'm sure this should all be fine. Just a very cautious person and I can't call the bank till Monday.

Never had bridging finance before so how does it work?

We're going to be doing this soon, when we subdivide our block. Here's some of the main points I understood -

*You don't have to make mortgage payments AT ALL for the first 12 months - on the bridging loan - but when you're calculating how much you need to borrow, it'll be cost of property + stamp duty + 12 months repayments.

So, that gives you 12 months to sell your house. Once the house is sold, the money pays off the original mortgage, with any surplus going into the bridging loan, which then automatically becomes a normal mortgage.

Does that make sense?

(asked my DH, a banker, to help)


Fiona,

Bridging Finance is a short-term loan to provide funds for an asset purchase pending a subsequent cash inflow. The source of clearance is usually the sale of another asset (eg, a house). When used for property transactions the amount of Bridging Finance is usually the same as the net cash to be received from the sale.

Most banks only provide Bridging Finance when the source of clearance is assured - typically a loan application would only be approved when supported by a Contract of Sale for an existing property. In other words you have to sell before you buy and use the Bridging Finance simply to 'bridge' the period between the two settlements (that is, of course, unless you can demonstrate to the lender that you can afford the repayments on both loans from regular cash flow; simply having the savings set aside for meet several months' worth of repayments generally doesn't cut it).

An example:

- Buy house for $500,000 plus acquisition costs $25,000 = total outlay $525,000 to be funded by:
30-year Home Loan $200,000
Sale of existing home $325,000 (net equity)
Total funding $525,000

- Settlement is scheduled for 1 March

- You sell your house for $325,000 with settlement scheduled for 30 April

- You would need to apply for two loans; one being the ongoing long-term Home Loan you will pay-off from regular income, the other for 60 days to be cleared from the sale of your own place.

Hope this helps. I have worked for two of the four majors providing mortgage loan finance and am happy to offer assistance if required (in a personal capacity of course, not as a 'salesperson')

Bath's DH

Thanks Berenice, Bath and Bath's DH!

I'm a little confuzzled. There seems to be two school of thoughts a) that bridging finance is quite easy to get and b) that it's not easy to get.

But in terms of whether we could demonstrate to a bank that we could service both loans - it would take 60% of our regular income on interest only loans so in theory, we could afford it (though in reality we'd probably use our savings as a top-up). But I'm only expecting to have to do that for three months. I guess some people use 60% of their income to service one loan these days so the bank shouldn't be too difficult about it.

So we should be right?

I hope I get this right (DH is out ATM)... There are lots of tricks to the trade if you know them but especially since the GFC the climate has changed somewhat and lots of these loop holes have been closed eg the "Low Doc" and even "No Doc" loans. 60% of gross income is too high unless you are have a private banker which means you are a high net worth customer. DH mentioned that 30% - %40 is the figure most banks work with. DH is a fairly "aggressive" lender ie he will really go in to bat for his clients... most lenders take a very conservative approach especially since the GFC like I mentioned. Of course DH works as a private banker now and things may be different in branch-land. Please don't hesitate to give us a call or even drop over for a cuppa, and DH will give you the low down from the perspective of lending through the "Big Four".

No worries Bath. I've put in an offer (it's sale by negotiation) subject to building inspection and finance and will give the bank a call tomorrow to discuss.

If it's looking like a problem, I'll definitely take up your offer of your DH's advice over a cuppa.

I'm at home all day tomorrow (with Wade still being so ill and all) and DH gets home from work at about 6.30... so maybe after dinner? It might take a few days to get an appointment with the bank though... offer's open for the rest of the week though :)

Thanks Bath - this week's a bit tricky cos DP is working lates which means I would have to bring DD on the train at bedtime. Am not trusting DSD to babysit DD at the moment after recent incident!!!

Next week would be better because DP will be around in the evenings so we could either drive over with DD OR DP could stay home and do the bedtime thing.

So I'll see how I go with the bank this week and let you know.

And thanks so much for the offer again.

AND I didn't know Wade had been ill. How did I miss that :redface::redface::redface:? Hope he's doing OK.

Next week will be fine too. :)

I haven't really mentioned it here in BB but I spent all of last week in hospital with Wade who had pnuemonia. I really only put updates on FaceBook... BB was a bit too tricky to navigate using my mobile phone... FaceBook is much more phone friendly (to post in etc)... you should join up ;)

Very, very sorry to hear about Wade Bath. Hope he's on the mend - pneumonia sounds pretty nasty.

Think we're fine. Bank has approved top up loan to our existing mortgage so we can pay the deposit next week. No jumping through any hoops required.

They haven't reviewed app for bridging finance yet but it's only for a month. They did Indicate that it would be at 12% - I said I'd do some shopping around as we don't need to come up with that lump sum for a few months. May not be worth the hassle of shopping around but I'll have to see what the sums work out as.