When you're looking to expand your investment portfolio, timing can make or break a property deal. The question many Fremantle investors face is whether to buy or sell first. With the local property market moving quickly, waiting to sell your existing investment property before purchasing your next one could mean missing out on the perfect opportunity.
This is where bridging loans become invaluable for property investors. These short-term loans bridge the gap between buying your new investment property and selling your current one, allowing you to act decisively when the right opportunity presents itself.
What Are Bridging Loans for Investment Properties?
A bridging loan is a short-term financial solution that allows you to purchase an investment property before selling your existing one. The loan term is usually 6 to 12 months to sell your existing property, or up to 12 months if the new property is being built.
These loans work by covering the contract purchase price of the new home while you retain ownership of your current property. Once your existing property sells, you use those proceeds to pay down the bridging loan amount, leaving you with your standard investment loan on the new property.
Understanding Peak Debt and End Debt
When applying for a bridging loan, lenders will assess two key figures:
• Peak Debt: The total amount you'll owe when you own both properties simultaneously
• End Debt: The remaining loan balance after selling your existing property
Your borrowing capacity must accommodate the peak debt period, which represents the highest financial exposure during the bridging process.
How Bridging Loan Rates Work
Bridging loan rates are typically higher than standard home loan or investment loan rates, reflecting their short-term nature and increased risk. You'll encounter:
• Variable interest rates: Most common for bridging loans
• Fixed interest rate options: Available but less common
• Interest capitalisation: Option to add interest payments to the loan balance
Mortgage brokers can access bridging loan options from banks and lenders across Australia, helping you secure competitive rates for your financial situation.
The Application Process
The streamlined application process for bridging loans typically requires:
- Income verification: Recent bank statements and income documentation
- Property valuations: For both existing and proposed investment properties
- Loan application: Detailed financial assessment
- LVR assessment: Loan to value ratio calculations for both properties
Lenders mortgage insurance (LMI) may apply depending on your loan to value ratio across both properties.
Calculating Bridging Loan Repayments
Calculating bridging loan repayments involves several components:
• Principal and interest: On the new investment property loan
• Interest-only payments: On the bridging portion
• Existing loan payments: Continuing on your current property
Many borrowers utilise an offset account to minimise interest charges during the bridging period. This strategy can significantly reduce the cost of carrying both loans simultaneously.
Getting Pre-Approved for Success
Loan pre-approval is crucial when using bridging finance for investment properties. Getting pre-approved allows you to:
• Act quickly when you find the right investment opportunity
• Understand your exact borrowing capacity
• Negotiate with confidence at auctions or private sales
• Secure interest rate discounts available at application
Managing Stamp Duty Considerations
Investment property purchases in Western Australia attract stamp duty, which must be factored into your bridging loan calculations. Your mortgage broker can help structure the loan to accommodate these additional costs within your overall borrowing capacity.
Why Choose Professional Guidance
The complexity of bridging loans makes professional guidance essential. Experienced mortgage brokers understand:
• Which lenders offer the most suitable bridging loan options
• How to structure applications for optimal approval chances
• Strategies to minimise interest costs during the bridging period
• Exit strategies to ensure smooth transition to standard investment lending
For Fremantle investors, working with local mortgage brokers who understand the regional property market dynamics can provide additional advantages in timing and property selection.
Bridging loans offer investment property buyers the flexibility to capitalise on opportunities without being constrained by settlement timing. While they require careful planning and professional guidance, they can be instrumental in building a successful property portfolio.
Ready to explore bridging loan options for your next investment property purchase? Call one of our team or book an appointment at a time that works for you.
