What is a bridging loan?
A bridging loan, or bridging finance, is a short-term loan that can help you finance the purchase of a new property while you enter the market to sell your current property.
Bridging loans can also provide necessary finances to build a new home while you remain living in your existing property.
Most people prefer to sell their previous home first before they purchase their new home with the available equity, yet every situation is different and in some cases buying first may suit your current financial position better.
How do bridging loans work?
Let’s say you have found the house of your dreams, but are yet to sell your current abode.
To meet the gap between receiving funds from the sale of your existing home and buying your new property, you may require finance in the form of a bridging loan.
A bridging loan is essentially providing a line of credit to cover the ‘bridge’ between purchasing the new property and receiving settlement funds on the old.
It’s important to remember that you’ll need to pay your original home loan and the bridging finance loan at the same time. You’ll be required to show evidence that you can repay the bridging finance interest costs during the period between buying and selling.
Once you’ve sold your old property, you generally have 12 months to repay the cost of the ‘bridge’.
If you don't have a realistic exit strategy for your bridging loan, such as a buyer lined up to purchase your current property, they have the potential to bring unnecessary risk including financial hardship. If the sale of your existing home does not go through, you could be stuck with an expensive loan for an excessive amount of time.
Alternatives to bridging loans
Additional home loan
A viable alternative to a bridging loan includes applying for an additional home loan to purchase your new property. To do this, you would need to be able to make repayments on both mortgages and be able to qualify for both loans.
Applying for an additional home loan will also depend on the size of your initial mortgage and how much interest you’re paying, compared to how much you would likely be paying in rent if you’re unable to sell your existing home before purchasing a new property.
Altering the purchase contract
Depending on your circumstances, it might be possible to add a “subject to sale” clause on the contract for your new home.
This means that the contract on your new home would not become unconditional until you have sold your existing home.
Negotiate longer settlement period
By negotiating a longer settlement period, you may allow yourself some extra breathing room to sell your existing property before your loan for the new property begins.
Simultaneous settlement
Another alternative that requires precise planning from all parties, is a simultaneous settlement. A simultaneous settlement is generally more difficult to achieve than a traditional settlement as the purchase of your new home and the sale of your old home happens on the same day.
If you’re ready to buy immediately and know the address of the home you want to buy, you can get ahead on your research and download a free property report.
One of our helpful loan experts can aid you to estimate the costs of your additional home loan or navigate alternative options that may best suit your financial position.
Pros and cons of bridging loans
Before considering a bridging loan, it’s important to research, compare options and consider your current financial position before diving in.
Pros
- Bridging loans present the ability to help ensure you can buy your dream home right away, without having to wait for your current home to sell.
- Depending on how your loan is structured, during the bridging period you may only need to make repayments on your current mortgage.
- If the timing is right, it could be possible to avoid the costs and hassle of having to rent a home in the period between the sale of your existing home and settlement of your new home.
Cons
- If you don’t sell your home in the required time frame, you may be left with interest bill shock, or as a worst case scenario, risk the bank stepping in to sell your home.
- If your property sells for less than you expect, you could also be left with a larger ongoing loan amount, potentially placing you at risk of financial hardship.
- Bridging finance may require two property valuations, which could mean two valuation fees as well as other associated costs.
- Interest is usually charged on a monthly basis, so the longer it takes to sell your property, the more interest your new loan may accrue.
- If your current home loan lender doesn’t offer a bridging loan, you may be required to to switch, resulting in early exit fees from your current loan.
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