Compare Bridging Loan Rates

Selling your current residence before securing a new one can be daunting. But fear not. Bridging loans exist for this very reason.

What is a bridging loan?

A bridging loan can help 'bridge the gap' between buying your new home and selling your existing one, allowing a borrower to temporarily take on more debt to own both properties at once.

Typically, a person with a bridging loan won't need to make full repayments on the new debt during the bridging period. Instead, they may:

• Only repay the interest accruing on the loan, or
• Capitalise the interest, adding it to the loan balance until the property is sold.

Once the sale is finalised, the proceeds go toward paying down the original mortgage, and the remaining balance rolls into a traditional home loan.

How do bridging loans work?

There are two types of bridging loans out there:

• Closed bridging loans
  For borrowers who already have a buyer lined up and a confirmed settlement date.

• Open bridging loans
  For borrowers who've found a new property but haven't yet secured a buyer for their current home.

Bridging loans: a step-by-step walk-through

Here's a step-by-step breakdown of how a typical bridging loan works:

1. Bridging loan is issued

The lender provides funds to buy your new property. If the bridging loan is with a new lender, your existing mortgage will usually need to be refinanced so both debts are held by the same provider.

This is the point of 'peak debt'. You owe the value of the new home plus the balance of your old mortgage.

2. Borrower sells original property

The borrower will get to work selling their original property while continuing to meet their existing mortgage repayments and the interest repayments on the bridging loan (though sometimes these may be capitalised).

3. Original mortgage is repaid

Once the original property sells, the borrower will pay back their original mortgage and use the remaining fund to pay down some of the bridging loan.

4. Bridging loan rolls into traditional home loan

The left over balance will become a traditional mortgage and, hey presto, the borrower can rejoice in their new abode.

An example of how a bridging loan works

Suppose you still owe $500,000 on your current home, which you expect to sell for $800,000. You've found a new home worth $1,000,000.

• Your lender approves a bridging loan to cover the purchase.
• At peak debt, you owe $1,500,000 (new home + old mortgage).
• During the bridging term, you pay interest-only (or capitalise it).
• Once your old home sells, $800,000 goes toward clearing the $500,000 mortgage, leaving $300,000 to reduce your bridging debt.
• Your final home loan balance becomes around $700,000 (plus any capitalised interest).

Bridging loan eligibility and requirements

Bridging loans aren't available to everyone. Lenders often require:

• At least 20% equity in your current home.
• The ability to service interest-only repayments (even if you'll capitalise them).
• A sale within a set timeframe, usually 6-12 months.

How to compare bridging loans

Comparing bridging loans is much like comparing traditional home loans, but with a few differences. Here are the key factors to keep an eye on:

Interest rate

Bridging loans typically come with higher interest rates than traditional mortgages, largely because they represent a greater risk to a lender. Afterall, many people taking on a bridging loan could be borrowing more than their normal capacity.

Comparison rate

Comparison rates exist to highlight a general overview of the cost of a home loan, inclusive of interest and fees. A comparison rate that's notably higher than a product's interest rate could be a red flag.

Special offers or features

Some providers offer an interest-free period in the early stages of a bridging loan or the option to forego repayments for a time. These could be handy options for particular borrowers.

Maximum LVR thresholds

Bridging loan products tend to demand loan-to-value ratios (LVRs) of 80% or less at the time of peak debt.

Loan conditions

Bridging loans often come with strict conditions. Most are provided for terms of up to 12 months. In that time, the original property must be sold. If you don't or can't sell in that time, your lender might step in to speed up the process, whether that's in your best interest or not.

Lender benefits

The lender that provides the bridging loan will be the one that holds the resulting mortgage going forward. If particular features - like competitive ongoing interest rates or local branches - are priorities, they should also be considered.

Pros and cons of bridging loans

Pros of bridging loans

• Buy before you sell with confidence
  Bridging loans let you secure your next home without waiting for your current property to sell, reducing the risk of missing out.

• Avoid interim accommodation and moving twice
  You don't need to rent or arrange temporary housing while you wait to buy, which saves both stress and costs.

• Flexible repayment options
  Many lenders allow you to make interest-only repayments or even capitalise the interest, easing cash-flow pressure during the bridging period.

• Smooth transition into a standard loan
  Once your old property sells, the loan balance typically converts into a standard home loan.

Cons of bridging loans

• Higher costs than regular mortgages
  Interest rates and fees on bridging loans are often higher, and capitalised interest can add up quickly.

• Short timelines and strict conditions
  Bridging terms usually max out at 6 to 12 months. If you don't sell within that period, the lender may enforce a sale or refuse an extension.

• Peak debt pressure
  At one point, you'll owe a large part of the value of both homes combined. Even if it's temporary, this can be daunting and may stretch your borrowing capacity.

• Uncertain market conditions
  If your home sells for less than expected, you'll have less equity to reduce the bridging debt. That can leave you with a larger ongoing mortgage than planned and could push your LVR above 80%, possibly triggering Lenders Mortgage Insurance (LMI).

• Fewer choices
  Bridging loans require careful planning, and not every lender offers them - meaning you may have fewer choices than with a standard mortgage.

Alternatives to bridging loans

Bridging finance may not be the only option available to you. You might want to also consider:

Alternative #1: Negotiate with the buyer or seller

• Negotiating a longer settlement
  If you're confident you can sell your current property quickly, you might ask the seller if they mind pushing back the settlement date to allow for you to do so.

• Subject-to-sale contracts
  You could also submit an offer that's 'subject-to-sale'. If accepted, your purchase won't go through until you sell your current property.

• Rent your current or new property for a period
  You might ask the person buying your property or selling the new property if they'd mind providing a short lease agreement to get you over the line.

Alternative #2: Other mortgage options

• Refinancing your existing home loan to access equity
  If you have enough equity to own both homes simultaneously, but not enough cash on hand, you might be able to refinance your home loan to access some wealth.

• Taking out a second standard home loan
  If you have enough equity or a sizeable deposit, you could take out a second home loan rather than a bridging loan.

• Consider a construction home loan
  Looking for a financing solution to fill a gap between selling one property and moving into one that's still under construction or being renovated? A construction home loan might be worth considering.

Alternative #3: Adjust your timing

• Delaying purchase until after selling for reduced risk
  Selling before buying could present a simpler solution, but might mean finding temporary accommodation in the meantime.

Which lenders offer bridging loans?

Many banks and lenders offer bridging loans, including some of the big four banks.

Here is a non-definitive list of banks and lenders that advertise bridging loans:

• CommBank
• ANZ
• loans.com.au
• Bank Australia
• G&C Mutual Bank
• Australian Mutual Bank