Q: What types of home loans do you offer?

At Axton Finance, we understand that every individual’s financial situation and homeownership goals are unique. That’s why we offer a diverse range of home loan options tailored to meet your specific needs. Our home loan products include: Variable Rate Home Loans: With interest rates that fluctuate based on market conditions, these loans offer flexibility and potential cost savings over the long term. Fixed Rate Home Loans: If you prefer stability and want to lock in a consistent interest rate for a set period, our fixed-rate loans might be the ideal choice for you. First Home Buyer Loans: Designed to assist first-time homebuyers, these loans often come with favourable terms and government incentives to help you get started on the property ladder. Investment Home Loans: If you’re looking to invest in property, our investment home loans provide options to help grow your property portfolio with a tailored structure that meets your cash flow needs. Refinancing Solutions: We also offer refinancing options to help you secure a better interest rate, access equity, or consolidate debt. Our experienced mortgage brokers will guide you through the available options and assist you in finding the best home loan solution for your circumstances.

Q: How do I get an equity release? Can I use it to buy shares or renovate my home?

Firstly what is exactly is equity – quite simply its the difference between the value of your property and the loan against it. Most lenders will allow you to secure a valuation against your property owned and secure a loan up to 80% (sometime higher) of its value. For example a $1.0m home valuation with an exisating $500,000 home loan would support a maximum loan size of $800,000 (80% of the valuation). The released equity is $300,000. Most lenders will enable you to use this for any worthwhile purposes

Question 1

What types of home loans do you offer?

Accepted Answer

At Axton Finance, we understand that every individual&#8217;s financial situation and homeownership goals are unique. That&#8217;s why we offer a diverse range of home loan options tailored to meet your specific needs. Our home loan products include:

Variable Rate Home Loans: With interest rates that fluctuate based on market conditions, these loans offer flexibility and potential cost savings over the long term.
Fixed Rate Home Loans: If you prefer stability and want to lock in a consistent interest rate for a set period, our fixed-rate loans might be the ideal choice for you.
First Home Buyer Loans: Designed to assist first-time homebuyers, these loans often come with favourable terms and government incentives to help you get started on the property ladder.
Investment Home Loans: If you&#8217;re looking to invest in property, our investment home loans provide options to help grow your property portfolio with a tailored structure that meets your cash flow needs.
Refinancing Solutions: We also offer refinancing options to help you secure a better interest rate, access equity, or consolidate debt.

Our experienced mortgage brokers will guide you through the available options and assist you in finding the best home loan solution for your circumstances.

Question 2

What is home loan refinancing, and how can it benefit me?

Accepted Answer

Refinancing your home loan involves comparing  your existing home or investment loan with what is available in the wider market and if it makes financial sense it is swapped out with a new mortgage agreement typically with a new lender.. This process allows you to take advantage of better interest rates, more favourable loan terms, or access equity in your property to spend on almost anything you like. At Axton Finance, we understand that your financial situation and needs can change over time, and refinancing offers an opportunity to optimise your home loan. Here are some ways refinancing may benefit you:

Lower Interest Rates: If market conditions have shifted or your lending capacity and credit score is good, refinancing can lead to lower interest rates and cheaper monthly repayments. You can use the monthly savings and plough them back into the loan to help speed up your debt reduction plans or use the savings for any other of life&#8217;s demands.
Accessing Equity: If your property has increased in value or you&#8217;ve made significant repayments, you may have built up equity. Equity is simply the difference between the value of your property and the amount owing on it. Refinancing allows you to access this equity, which you can use for home improvements, investments, consolidating debts, or other personal or financial needs.
Consolidating Debts: If you have other debts with higher-interest rates, such as credit cards, car loans or personal loans, refinancing can be an effective way to consolidate these debts into your home loan. By doing so, you&#8217;ll have a single, more manageable repayment at a potentially lower interest rate but this needs to be applied with caution as you don&#8217;t want these typically shorter loan terms being paid over a much longer loan term associated with a normal home or investment loan
Changing Loan Features: Refinancing enables you to switch to a loan product with features that better suit your current circumstances. For example, you may want to move from a variable rate to a fixed rate, or vice versa, or set up an offset home loan which is a linked savings account that does not pay interest but the balance instead ‘offsets’ the balance of the mortgage loan which in turn can be an effective structure to pay off your home loan sooner.
Debt Repayment Strategies: Our mortgage brokers can work with you to develop a personalised debt repayment strategy, which may involve refinancing at strategic intervals to optimise your financial outcomes.

Before proceeding with refinancing, it&#8217;s essential to consider potential costs, such as exit fees from your current lender, application fees, legal fees and whether any other short term offers exist such as honeymoon interest rate periods or cashback offers from a shortlisted lender. Our experienced team at Axton Finance will conduct a comprehensive assessment of your financial situation using industry leading tools, guide you through the process, and help you determine if refinancing is the right choice for you.

Question 3

Can you arrange bridging finance?

Accepted Answer

Many people table the idea of using bridging finance  but few really understand how its operates or what it effectively achieves. At its simplest it enables a home buyer to purchase a new property before the sale of their existing home. More often than not it is owner occupiers rather than investors who will use this product.
The finance structure basically enables you to borrow up to the full purchase price of the new property plus all stamp duties and closing costs like stamp duity, legals. Generally the lender will give you between six and twelve months to sell your current property and release its equity to enable the current loan to be closed out and use any surplus money left over to reduce the bridging loan on the new property plus any interest fees and charges. Generally the interest on the bridging loan is capitalising (interest is added to the loan). Your responsibility is to only meet the repayments on the existing loan during the bridging time frame. A few important things to consider;

You generally need a fairly good amount of equity in your current property to consider the use of bridging finance especially if you new purchase property is likely to be more expensive than your selling property
Some lenders require servicing evidence (afforrdability testing) on the end debt position after your current home is sold but other lenders require your servicing evidence to be on the peak debt amount which makes it difficult to secure support with such lenders
Interest rates on bridging finance are generally not discounted and are higher for the term you might have bridging for
The bridging finance interest calculation only starts when the target purchase property settles so if you can negotiate a long enough settlement you might be able to secure a quick sale on your current property which maye minimise or completely eliminate the time frame you need to be exposed to a bridging loan structure

As you can see there are quite a few variables to bridging finance and not all lenders and policies are created the same so get in contact with us here.

Question 4

How do I know if I need to refinance my home loan?

Accepted Answer

Quite simply you need to be sure that that a refinance is going to save you a meaningful amount of money after any potential refinancing costs.
Fortunately we can calculate accurate savings you may be eligible for by comparing hundreds of lending products from over 30 lenders to tailor a lending solution that matches your needs and not just the lender involved.
In a rising rate market more than ever is it important to keep a regular eye on your current interes rate to ensure that it is remaining competitive. You can bet your bottom dollar that your current lender is unlikely going to tell  you that there might be a  heaper rate out there that may be more suitable and thats where our difference comes into play.
As a client of AXTON our systems ensure annual reviews of your structure that ensure your loan remains competitive and we work in the back ground to ensure we needle your current lender to ensure that your interest rate remains as compeitvie as possible.

Question 5

What does it actually cost to refinance?

Accepted Answer

Refinancing your home or investment loan is usually not that expensive but you need to be aware of a few things. As a rule of thumb a simple refinance will not cost more that $500-$750 but the upside could be many thousands in saved interest and could slash years off your existing loan.
In recent times many lenders have also been offering cashback rebates on your home loan if you refinance to them which can be several thousand dollars but like with most things there are often catches. The good news is that we can help you evaluate this possible benefits and compare apples with apples.
Basic refinance costs are discharge fees payable to your current lender usually about $300 per mortgage, lender legal fees may or may not be included in this cost but are usually less than $250. Government discharge and mortgage registration fees are payable and differ from state to state but again are less than a few hundred dollars per mortgage security (property). 
One important consideration is if there are break fees payable to paying out a fixed loan early. However generally speaking if your current fixed rate is cheaper than the preailing rates your lender will let you out without charge. If you need to break a fixed loan and the fixed rates have fallen below current fixed rates the you may be up for a pretty expensive cost in many cases. Each lender uses a different calculation and its usually easy to get a quote just by ringining your current provider.

Question 6

What information do you need?

Accepted Answer

The key to a smooth mortgage application is ensuring you are able to supplythe required support docuemention in an efficient manner. Fortunately AXTON utilises cutting edge technology to help automate and streamline much of this process for you. Support documents often include but are not limited to suitable identifiation like a drivers licence and passport. Evidence of income by way of supplying payslips (usually this is sufficient for PAYG employees), tax returns and/or employment letters . Self employed clients often have higher complexities so we usually will work with your accountant to request the exact documentation required to support the approval of your application.

Question 7

Do I need to get a property valuation?

Accepted Answer

No we will organise the upfront valuation on your behalf and usually at no extra cost. Securing a real estate agents appraisal is not often of much use for lending purposes other than providing a yard stick for what a best case scenario may be should you sell &#8211; a bank valuation is completed by a licensed valuer and it prepared for the purpose of assessing risk. The valuers job is to determine risk should the property need to be ever sold and not to provide you as a borrower with a a best case marketing estimate.
Lenders and banks will always want to know the value of your property to determine how much equity you have available to determine your LVR (Loan to valuation ratio). This is a leading indicator to any lender on how much risk they are taking. The higher the LVR the risker the deal will appear to the lender.

Question 8

How do I get an equity release? Can I use it to buy shares or renovate my home?

Accepted Answer

Firstly what is exactly is equity &#8211; quite simply its the difference between the value of your property and the loan against it. Most lenders will allow you to secure a valuation against your property owned and secure a loan up to 80% (sometime higher) of its value.
For example a $1.0m home valuation with an exisating $500,000 home loan would support a maximum loan size of $800,000 (80% of the valuation). The released equity is $300,000. Most lenders will enable you to use this for any worthwhile purposes

Question 9

What is the best way to structure an investment property loan?

Accepted Answer

We arrange investment loans for clients across Australia and there are numerous ways you can possibly achieve this that often have important tax and accounting implications. Like any ledner, bank or broker we are unable to advise on a specific structure but we can help suggest what may be suitable from a lending perspective which can then be checked against any advice received from you licensed tax accountant.
Common structures may be to purchase an investment in apersonal name, jointly with a another person, as tenants in common, within a company name, a trust (discretionary, unit or less often hybrid trust) or even within an SMSF (Self Managed Superannuation Fund). There are many pros and cons that will significantly determine which lenders on our panel of over 30 who will  be suitable for your investment loan structure.

Question 10

What is an offset account?

Accepted Answer

Offset accounts a just like any ordinary savings account that has a BSB and account number but they are linked electoncially to your mortgage account to reduce the interest charged on your loan split. For example you have a $750,000 home loan owing and an offset account with $50,000 balance. The offset account, as the name suggests, reduces the interest charged against the balance owing on your home loan and your balance for interest  charged is reduced to $700,000.
Not all offset accounts arr equal. Some a partial offset account which can greatly dilute the benefit of surplusfunds you have sitting idle. Fixed loan splits generally cannot have a linked offset account with the exception of a few lenders who allow this to be done during a fixed term.
Generally offset accountswill increase the interest rate charged or fees levied so its important to consider the benifit of having such a feature. Fortunately you can get much the same outcome as an offset account as a

Question 11

Can I have more than one offset account?

Accepted Answer

Yes, having more than one offset account reducing the balance of your home loan is a feature that is increasingly available with a number of lenders on lour panel.
Having more than one savings or transaction account was a concept made extremely popular by the Barefoot investor Scott Pape. The concept basically revolves around creating buckets for your money to provide better accountability to your spending habits which improves budgeting without actually having to really budget everything down to the last cent. This idea was based on having savings accounts with the one lender but of course the interest you earn is often next to nothinging.
So imagine the benefit you may be entitled to with the right lending structure that allows multiple offset accounts to reduce the interest charged each month to your home loan. Say you have mortgage repayments due monthly, insurance premiums due annually, private school fees that you need to pay quaterly, a holiday fund you add money to each fortnight. This can become a huge juggling act if you try and do this out of one or two accounts. Imagine nicknaming each account and putting money in each account regularly as planned. The beauty of this multi offset structure is that the combined balance of the accounts will reduce the daily balance of your home loan which can significantly reduce the balance of your home loan saving you thousands and possibly years of your home loan account

Question 12

What is the credit card / offset account hack?

Accepted Answer

This is essentially the goal of keeping money in your possession for longer. I.e. any day that money is in your OFFSET account, you have reduced your interest cost.
So if a credit card can ‘pick up the tab’ for any period of time e.g. 30 or 55 days interest free credit cards. That is 30 or 55 days that money has been able to sit in your offset account, reducing your interest cost. As opposed to your money being handed over to a shop or merchant, on the day you buy something. The ctritical part of this play is that you MUST pay the credit card balance on time, to avoid paying interest on the credit card.

Question 13

Are pre approvals important? (and how long do they last?)

Accepted Answer

You have seen the property of your dreams on Thursday night but the auction is on Saturday! Should you panic? Not if you have a suitable pre approval or at very least a proper consultation with a licensed mortgage broker.
Pre approvals are usually a system generated letter (often an emailed pdf these days) that states you are ‘pre approved’ to a certain level. Now while this sounds comfortfing at first glance the lender will often have asterisks and fine print that make most pre approval subject to a whole host of variables that enable them to minise risk should your situation present differently at the stage you are ready to purchase.
For this very reason being properly informed by someone in the know will help you clearly understand what your pre approval prospects are and how important it is to actually secure a pre approval.
A ‘five minute’ online preapproval is often a very flimsy assessment of your capacity and we have sen inumerous situations where home buyers and investros have relied on these to buy a property at action only to be declined by the lender after a contract has been sold because of closer insection by the lender involved or because a bank valuation has come in light or stated income is insufficiently demonstrated when formal approval is being sought.
Our process invlicves a litte more duedilligence upfront to ensure you are clearly informed about your prospects of approval prior to any loan application being signed. Through our extensive experience we are able to run you though our detailed servicing analysis process that will firstly give you a good over view of which lenders will likely entertain your scenario and at what level. Secondly we will almost always recommend that we order a free credit check on your file to ensure no hidden surprises at submission stage. With the advent of positive credit reporting lenders will happily decline a poorly presented application if an undisclosed debt does not appear of there is a missing explanation for what can be trivial credit blemishes that may be unknown to you at the application stage without having a free run at a credit check.

Question 14

Can you do self employed loans

Accepted Answer

THis is our speciality! Being self employed and applying for a mortgage has traditionally been difficult with most banks and lenders but fortunately there are many more options available to you now than ten or fifteen years ago.
Increasingly lenders have devised alternative ways of assessing your income that enable your loan can be approved.
Such policies include but are not limited to acdepting just 12 months of self employed tax returns to determine loan approval, enabling fast track approvals using only your ATO notice of assessment (no tax returns required), relying on an affordability statement from your account, reviewing your BAS (Business Activity Statements) turnover to see a trend in your high level profitability, accepting tax returns in a draft format that is accompanied by a letter from your accountant, enabling a refinance to take place when a dollar for dollar proposal is being presented. The list of possible policies neiches to support your loan apprtoval is extensive and varies all of the time so reach out to us today to discuss your proposed scenario today.

Question 15

Can you help first home buyers?

Accepted Answer

Purchasing your first home should be an exiting time not a daunting one! So we have designed our firsthome buyer finance process to be one that welcomes questions and guides you through the process step by step so you leave your firstmeeting with confidence knowing what how you can comdfortably borrow and the process that need to be followed to achieve the successful outcome to us. People ask if there is a fee for meeting with us if you are a first home buyer and the simple answer is no &#8211; so what do you have to loose. Leave the bank jargon and product Call one of the team today to discuss your needs now.

Question 16

Do you help property investors?

Accepted Answer

Whether you have a portfolio of ten investment properties or if this is your first investment property loan we have the depth of knowledge and experience to navigate the confusing world of investment property loans.
Often there are important tax considerations when arranging finance for an investment property like whether to buy the property in your personal name, a company or trust or to invest through your SMSF. We can work with your accountant or financial planner to help tailor a solution that is right for you. Need an interest only investment loan in a company name for a self employed applicant &#8211; we can do that and much more! Call us today for an obligation free discussion.

Question 17

What is your cheapest homeloan rate?

Accepted Answer

We love getting the best deals in the market for our clients on a daily basis and fortunately there are always hundreds of lending products being offered all ofthe time. The key to getting the best rate is always understating what is the best rate for your scenario. A quick online search of’waht is the cheapest home loan rate’ generates alost unlimited suggestions and without a proper understanding of how to match your scenario and needs with a range of suitable lenders will just result in you going crazy. Cheap internet rate are well known in our industry to be pretty voliile and often difficult to be approved for unless you fit a pretty specific target market that they are after. Further more the lender you select is under absolutely no obligation to tell you that there might be a better rste out there. As a client of AXTON Finance we are obligated however to always act in your best interest at every stage &#8211; the major banks and lenders are exempt from this legislation and can press you into any loan they seefit.

Question 18

Do you have cash back refinances?

Accepted Answer

Absolutely, we have access to almost all the current cash back home loan refinancing in the market place but it pays to understand the details. Did you know that if you walked into any bank off the street and asked them for the best home loan with a cash back offer they are under no obligation to act in your best interest but to ‘sell’ you only loans from their institution! This is quite the opposite with a licensed mortgage broking firm like AXTON Finance. We are mandated under Best Interest Dutites (BID) to offer you a loan that is most suitable to your needs available in the market place &#8211; our role is to consult to you your options rather than sell you a home loan with a sugar hit of a cash back offer.

Question 19

What does DTI mean and is it important?

Accepted Answer

Increasingly lender jargo is creeping into the mainstream media and DTI is fast becoming an often quoted measurement. DTI or Debt to Income Ratio is simply a measure of total household gross income relative to all household debt (including not just the loan you are applying for but credit card limits, car loans, personal loans etc). Generally speaking most banks and lenders will want to see a DTI of less than six (6) times but some are willing to stretch further to seven or even eight times gross household income. With that said its generally not often wise to max yourself out the upper thresholds of this level unless there are specific strategies in place. For example property investors often have higher DTI’s because of the investment property loans in place but this can theoretically be reduced quite quickly with the sale of one or two investment properties. Alternatively younger people who are in their earlier stages of their careers may be willing to stomach a higher DTI ratio on the basis of their projected income earnining potential. It pays to understand how different lenders apply this important metric than to try and DIY it with your local bank or lender alone.

Question 20

What does LVR mean?

Accepted Answer

Another industry common acronym is a LVR or Loan to valuation ratio. This ratio is an important metric that measures possible risk to a lender based on how equity you have in your property relative to the loan you require. This metric is applied to your home or investment loan the same way it would be if your were a large corporate investment entity were buying a skyscraper in Collins Street Melbourne!
For example a home loan of $500,000 on a $1,000,000 property has an LVR of 50%. While a home loan of $900,000 on the same $1,000,000 property has an LVR of 90%. Ideally banks and lenders want to see you borrow 80% or less of the value of your property. Borrowing in excess of 80% means you may have to pay mortgage insurance which usually increases the interest rate charged on your loan as well as applying a once off levy knows as lenders mortgage insurance or LMI (see FAQ relating to this).
The LVR is determined by a bank appointed valuation which we can usually secure for you upfront prior to loding any finance application which can help reduce the risk of any unknown variables that a bank appiointed valuation could bring up. It basically helps us ensure that your loan application is approved as planned right for the very start!

Question 21

Does it cost extra to use a mortgage broker?

Accepted Answer

Usually it doesnt cost you anything extra to access the services of an experienced mortgage broker like the award winning team at AXTON Finance. Lenders ordinarily pay a broker a commission made up of a small upfront payment and a management trailing fee that the lender considers would be a direct cost to them through a branch that would require marketing costs, staff expenses and other normal business overheads that a mortgage broking firm will incur at no significant risk to the lender. Because the rates and fees are pretty much always the same going through a broker as they are if you attempted to navigate the market yourself you dont have much to loose by appointing an experienced mortgage broker.
Further more mortgage brokers are required by legislation to act in your best interest at all times unlike dealing directly with a bank or online lender. Our process will clearly lay out our tailored recommendation to you as well as a clear disclosure of how we are remunerated and whether any additional fees or charges would be payable. This is something that you are likely going to get from going direct to a lender yourself!

Question 22

How do mortgage brokers gets paid?

Accepted Answer

Usually it doesnt cost you anything extra to access the services of an experienced mortgage broker like the award winning team at AXTON Finance. Lenders ordinarily pay a broker a commission made up of a small upfront payment and a management trailing fee that the lender considers would be a direct cost to them through a branch that would require marketing costs, staff expenses and other normal business overheads that a mortgage broking firm will incur at no significant risk to the lender. Because the rates and fees are pretty much always the same going through a broker as they are if you attempted to navigate the market yourself you dont have much to loose by appointing an experienced mortgage broker.

Question 23

How safe is my data?

Accepted Answer

We reconginse that we deal in your private data and for that reason our head aggregation group whom we pay significant professional membership fees to enforce bank grade data security and encryption processes. All device logins by AXTON finance enforce mandatory two factor authentication (2FA) and anti malware, anti virus and anti ransomware protection for all of our clients. If you would like to know more about our CRM data security provided through our aggregation partner and licensee please reach out to us for more information.

Question 24

How does your process work?

Accepted Answer

Our system is near digital from start to finish which helps get your loan approved sooner. This includes super convenient online booking links for online or inperson meetings (like this one here to book an initial consultation), two factor controlled client centres to collect application data and compliance questions as well as various online VOI (verification of ID processes which are great if you are an expat overseas of interstate to us) and docusign processes for alost all loan application and loan offer documents with our panel of over 30 major banks and lenders.
Generally we will have your initial call where one of our experienced brokers will complete a discussion about your highlevel needs. Once we work out that there is a feasible scenario that we can assist you with we will start a digital portal file or update your existing profile with any currently known information before sending to you to complete and review in more detail.
Our secure clients centre is sent to you on email with two factor authentication for you to review and submit back to us prior to your meeting online

Question 25

Whats the maximum amount I can borrow?

Accepted Answer

We are the absolute experts at answering this question daily but we need to assess a hot of factor to be accurate and reduce the number of unknown unknowns as they say. A quick online borrowing capacity or a so called instant pre approval is rarely a reliable (or responsible) assessment to determine your borrowing capacity. We will take time to cleary understand your position, income sources, equity available, credit history (we can order a free non invasive credit check prior to submission for you) as well as a discussion around yourliving expenses to match what sort of loan limit would be comfortably suitable to you rather than simply securing a massive loan that a lender approves because they say you can ‘afford it’.

Question 26

Will rising interest rates affect my ability to borrow?

Accepted Answer

Yes rising interest rates will reduce your capacity to service (afford) larger loans. There are multiple ways of being able to improve your borrowing capacity in ways that can responsibly improve how you present to a a lender or bank. Simple tips may include reducing credit card limits or

Question 27

I am an Australian expat can you help me?

Accepted Answer

Chances are you have Googled this term and yes &#8211; we can help expat Aussie clients like you. Its a special niche that we can help you navigate successfully and avoid you a whole lot of wasted time trying to deal direct with your bank who may not have a clearly defined or well understood position of their own expat lending policies. Its important to get an expert into your corner. For more detailed introduction to expat lending and the basic parameters please check out this great blog article here and book an online meeting at the end of the post if you would like to discuss further!

Question 28

Can you arrange lending against a property in the USA or Europe?

Accepted Answer

We can only arrange mortgage lending for Australian expats against Australian-based property. If the property you own or are looking at purchasing is based overseas then we could only really look at borrowing (cash out) against any equity you have in any property that you may already own in Australia. The balance of any lending against a non-Australian property (eg a property in the USA, Singapore, Europe etc) may need to be arranged by a local broker or lender.

Question 29

Can I have my parents as guarantors?

Accepted Answer

Yes but the term guarantor needs to be clearly understood and the suitability of the structure clearly defined before proceeding further.
Parental guarantees are generally only in the form of equity guarantees only and not servicing guarantees. What does this mean?
Equity Gurantees are the common form of help parents give their children and is formed by ‘pledging’ equity in a property usually the parents owner occupied home or an investment property owned by the parents.
Servicing guarantees are no longer available as it was a form of promise that said Mum and/or Dad will provide personal assurances that they will have enough income to boost the borrowing capacity of their children &#8211; this was esentilally stopped many yeartsago but remains an often asked question

Question 30

What are the requirements to be an acceptable guarantor?

Accepted Answer

Generally speaking, you must be related to the proposed equity guarantor.
In most circumstances, it&#8217;s okay to have guarantor support from your mother, father, brother, sister, and sometimes even aunts, uncles and grandparents if the situation is suitable.
A guarantor should be in a sound financial position meaning they should have good equity and have comfortable means to meet their own commitments even if there were a default situation (which of course is usually very rare but possible).
We recommend even if the lender doesn&#8217;t that a guarantor should seek independent financial and legal advice to protect their own interests.

Question 31

How does bridging finance work?

Accepted Answer

Bridging finance is a term often thrown around in client meetings but not many people really understand how this policy works. So lets start at the top and work our way down.
Imagine that you have seen your dream home come up for sale and you haven&#8217;t sold your current property yet or even considered selling it yet &#8211; then you might need bridging finance.
In its simplest definition, bridging finance is a type of loan that enables you to buy a property and settle it before you sell your current one. So you can buy before you sell!
Bridging finance enables you to fund the purchase price of a ‘to be purchased’ property, usually in its full entirety plus closing costs (ie stamp duty and legal costs) and allows you to keep your current property and sell it within a reasonably short time frame (less than six months ideally). The lender charges you interest on the bridging loan and adds it to the balance each month until you pay it down with the sale proceeds of your existing property (less any existing debts/costs).
Let&#8217;s look at a simple example. Say you own your current home worth $1.0m and you owe $500k to the bank already (a 50% LVR / Loan to Valuation Ratio), you haven&#8217;t sold it and you might not even have it on the market yet, and you want to buy an amazing new home that you have seen for $1.5m &#8211; you might need bridging finance.
The purchase price can be funded with a new loan of say $1.6m to say cover stamp duty. At peak, you will owe $500k (existing) plus the $1.6m so call it $2.1m owing. If you have any cash deposit you could use it to reduce the total loan size required.
This $2.1m loan does not usually need you to make monthly repayments on the bridging component (ie the $1.6m loan) but you do need to keep repayments up to date on your current home loan. Interest however does accrue daily on the bridging loan component and is added monthly to the balance. This can get pretty expensive if you are in a bridging position for too long.
Of course, the main pro of this structure is you might be able to buy a property before you sell and minimise the risk of having to move twice if you sell first and can&#8217;t find your next home before the settlement of your current home. Furthermore, lenders will give you a loan size (in the short term) much larger than what your income might otherwise support to hold both properties for a period of time.
So what are the cons &#8211; well to be honest there can be a few and this list is by no means totally exhaustive so lets go through them;
Market Risks &#8211; without doubt, the biggest risk of using bridging finance is mainly around factoring in that you may not sell your current property in time or be forced into a situation that makes you accept a lower price than you might have otherwise been happy to accept. A falling market can be a risky place to be in a bridging finance position so being realistic in what you would sell for is an absolute must.
Costs &#8211; like any mortgage interest is calculated daily and charged monthly. With a bridging loan is the same but a little different. You must keep repayments up to your existing loan balance (or a calculator whereby the lender works out what the approximate loan balance will be at the end of the bridging period). The bridging loan interest is still calculated daily (usually at a higher rate) and the interest is added to the loan balance each month and paid out with the sale proceeds at the end of the transaction.
Timing &#8211; most lenders will want you to be in a bridging finance position for not more than six months and in some limited cases up to 12 months. But remember a bridging loan is usually a very large sum of money that you have borrowed and while you may not need to make monthly repayments the interest accruing could be adding up quite quickly.
The good news is that if you can negotiate a longer settlement on the property you have just purchased you might not need bridging finance for a very long time frame or at all. This is because bridging finance only kicks in from the settlement date of the purchase property. We can help inform you of what sort of solutions and purchase negotiations might work as an alternative to bridging finance that could help save you a lot of money and stress.
Market conditions &#8211; bridging finance favour certain market conditions better than others. As a general rule, a declining property market could be risky if you are using bridging finance and you have purchased before you sell. If the sale of your property takes longer than you anticipated and you are unable to meet market conditions the sale price you might be able to secure as the weeks and months roll on could be accelerating down to your detriment. Conversely, in a rising market, the opposite can be true &#8211; you bought a nice new expensive home before prices take off and you are selling your old home in an environment that favours you as a vendor. There is a degree of luck to this so it might not be for the faint-hearted unless you go into a structure with your eyes completely open.
Deposit &#8211; so we have identified that bridging finance might be an option but you need a cash deposit to secure your new home on the auction day! This is often an overlooked consideration by many buyers &#8211; but doesn’t the bank just give it to you I hear you ask? Not quite &#8211; you need to have finance approved to release equity against your current property first to release the deposit required (if you don&#8217;t have sufficient cash) or utilise redraw or offset funds to pay the required deposit. Increasingly we are seeing vendors accepting deposits less than the standard ten per cent deposit with five per cent becoming more common especially to bring more bidders to an auction or to accommodate a buyer like yourself who may be interested in trading up to a new property using bridging finance.
There are also options outside of using a cash deposit that we can discuss with you like using a deposit bond (basically an insurance bond issued by a reputable insurance company), a bank guarantee (increasingly rare these days), as well as a few other options that we can discuss with you.
Servicing requirements &#8211; this is just mortgage jargon for ‘can you afford the loan’. Lenders have a myriad of metrics that they assess your capacity to meet repayments when interest rates rise. With bridging finance there are a few extra variables to consider which can stress your ability to ‘afford’ the end debt loan amount once you have sold your current property. These variables relate to lenders applying a discount of usually about 15% of the current valuation of your home to ensure that in a forced event you could actually sell and settle your property which would in this worst case result in a sale proceed being reduced and thus the ultimate loan you require increasing. Furthermore, the lender will add up to twelve months of interest on the bridging loan amount (in addition to the sale price discount) to ensure that the larger loan at the end of an extended period could be closed out and still be affordable. The lender of course will only charge you for interest that you used which is why it pays to minimise a bridging loan time frame. We can help you navigate the ins and outs of how lenders assess this risk and apply it to your personal scenario.
Complexity &#8211; not all lenders in the Australian mortgage market are prepared to offer bridging finance and pretty much each lender who does has a different process and assessment policy on how they interpret your structure before they will approve you &#8211; lucky for you we are experts at navigating this on your behalf. Many lenders make it a requirement that you are an existing borrower of their institution before they are happy to extend a bridging finance product to you. Because the funding and legal documentation required to be in place for bridging finance is only usually for a short period of time (under six months usually and often just a few weeks) the interest rate charged on the bridging loan component is often not discounted and will likely be at a much higher amount than what your ‘end debt’ loan will be one you have sold your current home. While this might be fine to achieve the property purchase you want, the cost and stress of bridging finance could add up to be a very expensive solution without the right advice.

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