Bridging Loans

Bridging loans are a short-term financing solution that helps homeowners buy a new property before selling their existing one. These loans are particularly useful in the following scenarios:

• Upgrading or Downsizing: Homeowners can buy their new property first without the pressure of selling quickly.

• Relocating for Work: Those moving to another city or state can secure their new home without delays.

• Buying at Auction: Immediate access to funds can be crucial when purchasing a home at an auction.

• Avoiding Temporary Housing: Allows homebuyers to move directly into their new home instead of renting while waiting for the old one to sell.

Without a bridging loan, homeowners might miss out on their dream property or be forced to sell their existing home below market value to make a quick sale.

What Is A Bridging Loan?

A bridging loan is a short-term home loan designed to cover the financial gap between purchasing a new property and selling the current one. It allows borrowers to secure a new home loan while they are still paying off their existing mortgage.

This type of loan typically lasts up to 12 months, during which the borrower makes interest-only repayments to ease financial pressure. Once the existing property is sold, the proceeds are used to reduce the bridging loan balance, which then converts into a standard home loan.

How Do Bridging Loans Work?

Here’s a step-by-step process on how they work:

1. Determine Your Loan Needs

Assess your current home’s value, outstanding mortgage, new property price, and expected sale price to estimate how much you need to borrow.

2. Compare Lenders And Loan Terms

Different lenders offer varying interest rates, fees and repayment structures. Choose one that aligns with your financial situation.

3. Apply And Submit Required Documents

Lenders require proof of income, credit history, property valuations, and an exit strategy (sale of your current home).

4. Loan Approval And Fund Disbursement

Once approved, funds are released to pay off your existing mortgage (if needed) and purchase your new home.

5. Sell Your Existing Property

You must sell within the agreed upon timeframe of 6-12 months. The proceeds will be used to repay the bridging loan.

6. Convert To A Standard Loan

After selling your home, any remaining loan balance transitions into a standard mortgage, with regular repayments.

Bridging loans can seem complicated, so here are two scenarios to help you better understand how they work.

Let’s Meet Jim And Nancy

Jim and Nancy have an apartment in the city, which they intend to sell. They have a mortgage balance of $300,000 on the apartment.

But before they’re able to sell it, they see a house come on the market in an ideal location that they don’t want to miss out on.

They apply for a bridging loan and get approved, during which the couple’s existing $300,000 loan becomes the bridging loan with a maximum term of 12 months.

For the new house, the couple gets approved for a $600,000 home loan. That means the couple now have a $900,000 peak debt ($300,000 existing debt plus $600,000 new home loan).

Formulas for reference:

Peak Debt = Existing mortgage + New home loan

End Debt = Peak Debt – Sale proceeds

Scenario 1: The apartment is sold

During the bridging period, the couple decides to make interest-only repayments.

The couple sells their apartment six months down the line for $400,000. Of this, $300,000 is used to clear their initial mortgage balance on the property that was sold.
This leaves them with remaining proceeds of $100,000:

• $400,000 – $300,000 = $100,000

If the couple decides to put this $100,000 towards clearing their home loan, too, then their home loan is reduced to $500,000:

• $900,000 Peak debt – $300,000 to pay off old mortgage – $100,000 Net proceeds from sale = $500,000.

Now that the property is sold, the home loan switches from interest-only to principal and interest repayments. Their repayments go towards paying off both the principal loan amount and the interest.

Scenario 2: The Apartment Is Not Sold

Twelve months later, the apartment remains unsold because the couple is not happy with the value of offers received.

The bank steps in to assist with the sale of the couple’s property for the best offer of $270,000.

The proceeds from the sale are not enough to pay off the couple’s apartment home loan.

So, the shortfall of $30,000 is added to the new home loan, subject to approval. This increases the home loan balance to $630,000.

Snapshot

• Peak debt: $900,000 – Proceeds from the sale of the apartment:
• $270,000 = $630,000 End debt

The couple makes principal and interest repayments on the $630,000 home loan now that this bridging period is over.

A Bridging Loan May Not Be Suitable Nor Are They Always Available To You.

Please speak with one of our specialist mortgage brokers to discuss all the options available to you.

Call us on 1300 889 743 or fill in our short online assessment form, free.

How To Calculate Bridging Loan Cost?

Bridging loans involve interest costs, loan fees and repayment terms, which can be complex to calculate manually. A Bridging Loan Calculator simplifies this by estimating your total loan (Peak Debt), final loan after sale (End Debt), and interest costs during the transition.

The calculator below provides a clear financial outlook, helping you plan your repayments effectively before committing to a bridging loan

Disclaimer: Our bridging loan calculator is designed to give you an estimate and is best used as a guide only.

What Are The Pros And Cons Of Bridging Loans?

Pros

• You can buy your new property right away. You don’t have to wait to get a loan.

• It gives you time to get a better price on your property. You can avoid the stress of having to sell your property quickly. By taking the time, you may be able to get a better price for your property.

• Interest-only repayments, which are capitalised on your peak debt. Your bridging loan repayments are usually ‘frozen’ during the bridging term, until you sell your existing home. You’ll have to keep paying only your current mortgage and not have to worry about managing two home loans.

• Banks charge standard interest rates. Capitalised interest increases total loan costs by adding unpaid interest to the principal. While banks typically charge standard rates, bridging loans once had higher rates, but some lenders now offer them at standard variable rates.

• The same fees and charges as a standard home loan. Application fees (usually around $600) are the same and you don’t have to worry about break costs or discharge fees for paying the loan off quickly. Keep in mind that most lenders won’t generally approve a bridging loan if you’re likely to sell the property in less than three months.

• You can make unlimited P&I repayments. To reduce your interest bill, you can

choose to make as many repayments on the bridging loan as you want until you sell your property.

• Avoid the costs of renting and moving twice: Sometimes renting and having to pay for the costs of moving twice may be a better option than getting a bridging loan. Not always. It’s important to speak to a qualified mortgage broker so they can help you do the sums to find out which option is better for your situation.

Cons

• Interest is compounded monthly. Although the interest is capitalised on top of the peak debt, the longer it takes to sell your property, the more your loan will accrue interest.

• You need to pay for two valuations. You’ll require valuations for both your existing property and the new purchase – each will cost about $300-$600.

• Higher interest rate if you don’t sell the property in time. If you don’t sell your existing home within the bridging period, many lenders will charge a higher interest rate. Many will also require you to start making principal-and-interest repayments on the peak debt, in order to service both loans. This can cause financial stress.

• No redraw facility. If you choose to make repayments during the bridging term but want to redraw for any reason, you won’t be able to do so.

• Normal early termination fees will apply if switching lenders. If your current lender doesn’t offer a bridging loan product, you’ll have to go with another lender, which will probably insist on taking on the entire debt (your existing mortgage plus the bridging loan). Because you’ll be switching lenders, you may be liable for early termination fees and break costs, particularly if you’re switching during a fixed-interest period.

Who Can Qualify for A Bridging Loan?

To be eligible for a bridging loan in Australia, borrowers must meet certain lender requirements:

• Sufficient Equity: While 50% equity in your property is recommended for a worthwhile bridging loan, it’s not a strict requirement. Some lenders accept lower equity based on serviceability.

• Serviceability Requirements: You must provide proof of income, employment, expenses, and other financial documents, similar to a standard refinance application.

• Bridging Term Limits: The maximum term is six months for purchasing an existing property and 12 months for a new property under construction.

• Property Listing Requirements: Some lenders require unconditional sale contracts on your existing property, while others accept an exclusive agency agreement from a licensed agent confirming the property is listed for sale.

Types Of Bridging Loans

There are two main types of bridging loans: closed bridging finance and open bridging finance.

Closed bridging loans

This is where you agree on a date when the sale of your existing property will be settled and you can pay out the principle of the bridging loan.

This type of loan is available only to homebuyers who have exchanged contracts on the sale of their existing property. Sales rarely fall through after the exchange so lenders tend to see them as less risky.

Open bridging loans

This is for people who have found their perfect property but don’t have an exact date to exit the bridging finance because they haven’t put their existing home on the market yet.

Lenders tend not to like these types of arrangements.

In cases like these, lenders will probably ask many more questions. They’ll want to see the details of the new property and proof that your current home is actively being marketed.

You’ll need a good amount of equity in your current property and an exit strategy in case the sale falls through.

Do You Need A Bridging Loan

Bridging loans are a great option if you need to move quickly to buy a property. Like any other home loan, though, it’s not a debt to be taken on lightly and it pays to speak to a professional mortgage broker so they can provide the right recommendations to you.

Please call us on 1300 889 743 or fill in our free assessment form today to find out if you qualify for a bridging loan.