Bridging Loans

A bridging loan is a short-term loan, which is often taken out and repaid within two weeks to three years. Longer-term financing will depend on eligibility and loan purpose.

The sum of money lent from the bank is to cover an interval between two transactions, which is usually the selling of a home and the buying of another.

If a homeowner has not yet found someone that wants to purchase their current property yet has found their dream home, a bridging loan comes in handy.

In Australia, bridging loans work by calculating the amount a person owes on their current mortgage as well as the price for the purchase of the new property. The figure valuated here is called “peak debt”.

An example of peak debt is as follows. If you owe $300,000 on your current mortgage and the value of the new home is $500,000, the peak debt is $800,000.

Whoever the lender is, the value of your current home (a likely sale price) will be subtracted from the peak debt figure, which will then conclude in your ongoing balance. Most banks will often add a buffer, just in case the home sells for less than expected.

Thereafter, most lenders will likely try to capitalise on the expected interest and therefore, make the bridge loan payable upon the sale of the existing property.

There are two types of bridge loans to be aware of:

Closed bridging loans

Closed bridging loans are for those who have already sold their property and are in the process (or have completed) the exchange of contracts.

This type of loan is much easier to attain and a pre agreed date will be set, which will indicate when the house will be sold and the loan will be repaid. The maximum loan term is preferred by lenders as it will ensure them that the loan payments will be met.

For a closed bridge loan, you will likely be required to provide a 20% deposit.

Closed bridging loans often involves application and monthly fees, so don’t forget to factor them in.

Open bridging loans

Open bridging loans involve buyers who have found their dream home but have not yet sold their current property. This type of loan involves no set time period to sell the current property, which makes them harder to find lenders for.

With lenders being hesitant, some tips to secure an open bridge loan include:

• Proof that you are actively marketing your current home
• Proof of existing equity
• An exit strategy

Bridging loans Australia, for an open loan, is often best for those who want to buy a new property while still trying to sell their own.

Yes, participating banks do still offer bridging loans. The two types of bridging loan options – closed and open are available to help with a cash deposit while in the process of selling a home to buy a new one.

To be eligible for a bridging loan, you must meet certain criteria.

• Home equity. Lenders will likely look into the equity of your current home. The more equity there is, the higher the chance of being approved for the maximum loan term.
• Maximum end debt. If an end debt is expected, then it should not exceed 80% of your property’s value. If it does, you may be liable to pay Lender’s Mortgage Insurance (LMI).
• If there isn’t an end debt. Most lenders will expect an end debt, which often comes with upsizing a home. Yet, if there is no end debt due to downsizing a home, then the legal fees might be higher.
• Sale contract. Some lenders might require a contract for the sale of your existing property and the property value for pre-approval.

Being eligible for a bridging loan will mean that you are one step ahead of buying your new property. Looking at using the equity in your existing or old property might help you have a larger deposit and improved financial personal circumstances, which could assist in your application. Being in a good financial position can assist with any loan application, especially those that are short-term and often considered riskier by lenders.

How long a bridging loan lasts depends on the type of loan. A closed loan typically lasts 6 months. Yet, some lenders will offer a bridging period of 12 months.

An open bridging loan will have no final date and could be open for a lot longer than 12 months. Some lenders will offer an open-end loan, so long as they attain repayment once you have sold your existing property. Professional advice will aid in the decision as to whether it is good for your financial situation to take out an open bridging loan. They will break costs down and ensure you can avoid more interest when trying to sell your property.

Knowing what the interest costs are will ensure that you can cover the overall loan amount. After the sale of your existing property, it is a good idea to close the bridging loan as soon as possible to minimise interest buildup.

The interest rates of bridging loans in Australia are often much higher than regular home loans. They are around 4 to 5% yet some can be as high as 6%.

When it is time to sell and time to move into your new house, closing the loan as soon as possible will guarantee to reduce the interest charged. Although you will still be obliged to pay the interest rate, the overall charged interest will be lower.

The most popular and cheaper alternative to bridging finance is a deposit bond. This involves paying a one-off deposit. If anything goes wrong, you will lose the deposit.

Another alternative is to seek a longer settlement period on your new purchase. This will give you longer to sell your current home.

There are both pros and cons of bridging loans. The main pros are:

• You can avoid paying for two home loans. With the help of a bridging loan, you can avoid taking out a new home loan for the new property.
• Interest-only repayments. The repayments for bridging loans are interest-only, unlike the usual mortgage loan payments.
• You don’t have to rush the purchase. With the help of bridging finance, you will not need to rush your decision. You can take your time selling your property while buying the new home.

The cons of bridging finances include:

• You could end up moving out without a permanent place to live. If your dream home is not yet on the market, then you might end up having to move out with nowhere to live.
• The need to rent a place. If you have nowhere to live, then you might need to look for a rental property. This will cause you to spend unnecessarily.
• Prices might skyrocket after you sell. The ease to purchase a property might be more difficult if you have not bought a new home yet and the property prices increase.
• The longer your home takes to sell, the more interest you will pay. Seeing as bridging finances is interest-only, you will need to pay more interest if your home takes a long time to sell.

With those pros and cons in mind, it is useful to know if and why a bridging loan is right for you and your financial situation when looking to buy a new property. Some tips to help you decide are as follows:

• Get a proper valuation of your existing home. Understanding the real estate market with no personal advice or knowledge could put you in the deep end when applying for a bridging loan and looking to buy a new property. Getting a professional real estate valuation will ensure that you know how much your property will sell for, which will ensure you can afford the new home.
• Be realistic with the sale price. Once you know the purchase costs and what your existing property could sell for, ensure to be realistic. Putting it up for a higher price could, generally speaking, take you a long time until your property sells. This could exceed your bridging terms or increase the interest payable.
• Aim to have at least 50% equity in your current home. Having at least 50% equity in your current home can make you more financially secure and feasible to purchase a new property, while also looking more appealing to a credit provider and a bridging finance loan company.
• Be realistic with how long it will take for your property to sell. Looking into your area’s current real estate market will indicate how long it could take to sell your existing property. This will also help with your lending criteria and ensure that you do not exceed your loan terms.