Most homeowners would prefer to sell their current property before securing their new home. However, sometimes life doesn’t work ‘neatly’ and home hunters find their ideal new property before their current home sells. In this scenario, a bridging loan can be useful.
As the name suggests, a bridging loan ‘bridges the gap’ between buying a new property and selling your existing home.
Here’s an overview of bridging loans in Australia:
How do bridging loans work?
A bridging loan can be taken out on top of your current home loan until it is sold. This short-term loan is a very fast and easy way to access your equity during the sale period.
A bridging loan’s minimum repayment will usually be calculated on an interest-only basis. This interest may be capitalised until your existing home sells on the market.
When you apply for a bridging loan, typically, the total amount you borrowed is known as the peak debt. This consists of the balance of the loan on your current home, any purchase costs and the contract purchase price of the new home.
Once your current home is sold, the net sale proceeds, which is the total sale price minus the seller agent’s fees and other costs, are used to reduce the peak debt. You now have the remaining debt called the end debt, which is repaid as a typical mortgage product from this point on.
Bridging loan benefits
Here are some of a bridging loan’s advantages.
- Flexibility: Bridging loans are renowned for being flexible, so you can structure the loan to suit your specific needs and repayments schedule. This flexibility can be particularly helpful for borrowers who are unsure about their long-term plans or who need financing for a short-term project.
- Speed: Bridging loans are usually approved quickly, which is ideal if you need funding for a project that needs to be completed very soon. If you need to settle a property transaction quickly and don’t have time to wait around for traditional finance to come through, a bridging loan could be worth considering.
- Convenience: Bridging loans help you to purchase your property straight away without waiting for your existing home to sell.
- Repayments: Depending on how your loan is structured, you may only be required to make repayments once your property is sold.
- Avoid renting: Bridging loans help avoid the cost and hassle of renting a home between the sale of your existing property and settling in your new home.
- Broad use of funds: Bridging loans can be used for a variety of personal or business requirements.
- You can apply for a bridging loan online. An online application is quick and convenient. Many lenders let borrowers apply for a bridging loan online. The processing times and application criteria vary from lender to lender, with fintechs, non-bank and specialist lenders tending to require less paperwork and offering faster processing.
What are the factors affecting a bridging loan?
Here are some areas to consider that affect a bridging loan:
- Your home equity: Lenders will review the level of equity in your existing home when assessing the amount they will allow you to borrow. Generally speaking, the more equity you have in your home, the more funds you can borrow.
- End debt: Many lenders offer bridging finance on the condition that there will be an end debt (the expected end debt must not be higher than your new property’s value).
If you need to move quickly to purchase a property or seize an opportunity, a bridging loan could be worth considering. Your finance broker can help to ensure you’re getting the most suitable loan for your requirements.