Selling your current residence before securing a new one can be a daunting prospect. On the other hand, if you already have a mortgage, the idea of taking out another home loan while still meeting your existing repayments could be similarly concerning. And it’s rarely realistic to expect your new home to settle on the exact day you sell your current abode.
But fear not. Bridging loans exist for this very reason.
What is a bridging loan?
A bridging loan can ‘bridge the gap’ between buying your new home and selling your existing one. It essentially allows a borrower to temporarily take on more debt so they can own both properties at once for a short period of time.
Typically, a person with a bridging loan won’t need to make repayments, or will only need to repay the interest accruing on the temporary debt, during the bridging period.
The principal balance, plus any unpaid interest and minus equity released in the sale, is typically rolled into a traditional home loan once both sales settle.
There are two types of bridging loans out there: open and closed. Here’s how they differ:
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Closed bridging loans
A closed bridging loan is for those who have a set exit date from their original property. It might be useful if you already have a buyer and a settlement date confirmed. -
Open bridging loans
An open bridging loan, on the other hand, might be the right option if you’ve found your dream home but don’t have a set date for the sale of your current place.
Which lenders offer bridging loans?
Many banks and lenders offer bridging loans, including some of the Big Four Banks.
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How do bridging loans work?
Bridging loans can be invaluable for property owners who find themselves wanting or needing to move into a new dwelling, but who can’t pay for their new home in cash.
When providing a bridging loan, a lender will provide the funds needed to buy the new property, with the borrower only needing to pay interest for a period of time.
Over the next few weeks or months, the borrower will work to sell their original property while continuing to meet their existing mortgage repayments and the interest repayments on the bridging loan.
When the original property sells, the borrower will pay back their original mortgage and use the equity to pay down some of the bridging loan.
The remaining balance on the bridging loan will be rolled into a traditional mortgage product and, hey presto, the borrower can rejoice in their new abode.
Typical bridging loan conditions
While bridging loans can be a handy tool, they also often come with strict conditions.
Most bridging loans 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, or renegotiate your loan conditional on you accepting a lower offer.
What’s a good bridging loan interest rate?
Bridging loans typically come with higher interest rates than traditional mortgages do.
That’s 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.
Bridging loan interest rates are often between 1% and 3% higher than those of a traditional home loan, and the products also tend to demand a loan-to-value ratio (LVR) of 80% or less.
Pros and cons of taking out a bridging loan
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Pros |
Cons |
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Enables purchase of a new home without waiting |
Higher interest rates compared to traditional loans |
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Provides flexibility in timing the sale of property |
Risk of managing two mortgages simultaneously |
|
Helps avoid the need to rent between sales |
Strict conditions and shorter loan terms |
|
Interest only repayments during the bridging period |
More complex than traditional loans |
Alternatives to bridging loans
If you’re considering buying a new home before selling your current place, a bridging loan could be a perfect solution. Though, you could find yourself with more than one option.
Here are a few ways you might be able to temporarily own two properties without applying for a bridging loan, or fill in the time gap between the purchase and sale of the properties without turning to the rental market.
Refinance your home loan to access equity
If you’re downsizing, you might have enough wealth to own both homes simultaneously, but not enough cash on hand. If your wealth is tied up in your current home, you might be able to refinance your home loan to access that equity.
With that equity now in the form of cash, you could purchase the new property and own both for a period.
Though, it’s worth remembering that the higher principal and interest repayments on the refinanced mortgage could outweigh the interest only repayments on the bridging loan.
Push back the settlement date on your new property
Perhaps a simpler solution would be to ask the vendor selling your new place if they would mind extending the settlement period. Depending on their circumstances, however, the vendor could be unwilling to wait longer than they need to in order to offload their property.
Rent your current or new property for a period
Another way around this conundrum could be to rent one of the properties in question for a few weeks of months. You could ask either the person buying the property you’re selling or the person selling the property you’re buying if they’d mind you signing a short lease agreement to get you over the line.
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.
Like bridging loans, construction home loans often allow a borrower to make interest only repayments until they’re ready to move in. They can also see funds drip fed to meet construction costs as they come up, meaning a borrower mightn’t pay interest on the entire cost from the get-go.
Bridging loan FAQs
Am I eligible for a bridging loan?
To be eligible for a bridging loan, you'll typically need to meet a lender's standard home loan criteria, plus hold enough equity in your current property.
Lenders will look at your income, credit history, and the value of your existing property compared to the new one when determining your eligibility.
What happens to a bridging loan when my current property sells?
Once your current property sells, the proceeds will be used to pay off your existing mortgage and reduce the bridging loan balance.
Any remaining balance on the bridging loan will then be rolled into a traditional home loan.
At that point, you’ll only have one mortgage to manage.
Do I need a deposit for a bridging loan?
While you don’t normally need a cash deposit to get a bridging loan, you’ll generally need enough equity in your current home to act as security.
For instance, if you have a house worth $500,000 and a $300,000 mortgage, you have $200,000 of equity that can be used to help secure a bridging loan.
Most bridging loan lenders require borrowers to have loan-to-value ratios (LVRs) of 80% or less.
Are bridging loans expensive?
Bridging loans can be more expensive than traditional home loans due to their higher interest rates, which are often 1% to 3% above standard mortgage rates. This reflects the higher risk to lenders, as you’ll temporarily own two properties.
However, during the bridging period, borrowers typically only need to repay the accruing interest. Some lenders even allow the interest to accrue without payment until the bridging loan is rolled into a traditional home loan.
This means your repayments during the bridging period are likely to be smaller compared to those demanded by an equivalent-sized traditional home loan.
Image by Mitchell Luo on Unsplash
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