Bridging Loans 101: What is it and how it works?

Are you looking to upsize or planning to relocate interstate? A bridging home loan can help you secure your next home while you are still in the process of selling your current property.

In an ideal scenario, you would be able to perfectly time the sale of your existing home and the purchase of a new one — but this is not always the case, given that there are market conditions to consider which can make the process a stressful experience.

This is where bridging loans come in, as they provide a convenient way to ensure that you can secure your next property while you are waiting to sell your current one.

What is a bridging home loan and how does it work?

A bridging loan, also known as bridging finance or relocation loan, is a short-term loan designed to assist homeowners in covering the financial gap between buying a new property and selling their current one.

With a bridging loan, you basically borrow against the equity in your current property, allowing you to access funds quickly and enabling you to make a downpayment or secure your new property before selling your existing home.

Depending on your lender, bridging loans typically have a shorter repayment period, ranging from a few months to one year. They come in two main types:

• Closed Bridging Loans: If you have a confirmed sale contract for your existing property, this type of bridging loan is right for you. With a closed bridging loan, the lender knows when they will receive the full repayment of the loan, making this option less risky. This option usually comes at a lower interest rate.

• Open Bridging Loans: In cases you have not yet finalised the sale of your current property, you can get an open bridging loan instead. These loans are more flexible but often come with higher interest rates due to the increased uncertainty surrounding the repayment date.

Typically, bridging loans can have a period of six months to 12 months.

When your existing property gets sold, the net proceeds will be used to pay off your bridging loan.

Here’s an example of how bridging loans work: Assuming you have an existing property with a mortgage balance of $300,000 and you want to move into a new home valued at $600,000. With a bridging loan, your lender will take over your current mortgage and your new mortgage, which means you can essentially borrow up to $900,000.

Depending on your arrangement with your lender, you can have repayments over the period of the bridging finance on an interest-only basis. You can also just wait for the sale of your home to pay for the whole loan and the interest it accrues.

So let us say that you are able to sell your home for $500,000, this will be used to pay for the bridging loan. Subtracting the amount from your overall loan will give a difference of $400,000 — this will then be rolled over to a standard mortgage product with regular repayments.

What are the benefits of getting a bridging loan?

The main advantage of getting a bridging loan is the certainty that you will be able to secure your next home even without having to sell early. It eases the pain points of the financing process between the two properties, allowing you to move on to your next home without a hassle.

• Swift Property Acquisition: Bridging loans empower you to move quickly when the perfect property comes on the market. It eliminates the need to wait for the sale of their existing property, ensuring you do not miss out on their best deals.

• Flexibility: With the option of closed and open bridging loans, you can choose the type that aligns with your individual circumstances. This flexibility makes bridging loans accessible to a wide range of homebuyers who are also in the process of selling their current properties.

• Minimal Financial Strain: Bridging loans alleviate the financial pressure of simultaneously owning two properties, as you can focus on selling your existing property at a fair market price without rushing into a sale due to financial constraints.

• Bridging Loan Facilities: Many lenders in Australia offer interest capitalisation, which enables you to roll up the interest on the bridging loan into the total loan amount, reducing the immediate burden of monthly interest payments.

Are there any downsides to bridging loans?

While bridging loans can provide a useful opportunity, you must take note of some of the risks.

• High-Interest Rates: Bridging finance often come with higher interest rates compared to standard home loans. The short-term nature of these loans, coupled with the risk involved for lenders, leads to increased interest charges. You may end up paying significantly more in interest over the loan term, especially if the property sale takes longer than anticipated.

• Market Fluctuations: The property market is subject to fluctuations and uncertainties. If property prices decline during the bridging loan period, you might end up selling your existing property for less than anticipated. This could result in a shortfall between the sale proceeds and the bridging loan amount, leaving you with a debt to repay even after the property sale.

• Strict Eligibility Criteria: Bridging loans typically have more stringent rules for eligibility. Lenders may require you to have a stable income, a strong credit history, and substantial equity in the existing property. Not everyone may qualify for a bridging loan, making it inaccessible for some borrowers.

How do you qualify for a bridging loan?

To qualify for a bridging loan in Australia, you will typically need to meet the following criteria:

• You must own a property that you intend to sell.

• You must be in good financial health — your income, credit history, and existing equity in the property will be assessed by the lender.

• You must provide a credible repayment plan, demonstrating how you will repay the bridging loan which can either through the sale of their existing property or through other means.

The application process for a bridging loan is similar to that of a traditional home loan. The borrower will need to submit documentation related to their property, finances, and the intended purchase.

Are bridging loans worth it?

If you want to conveniently transition from your current home to your next property without having to worry about funding, then getting bridging financing is the practical option.

The flexibility, quick access to funds, and the opportunity to secure a new property without the constraints of waiting for the sale of the existing one are enough reasons to consider reaching out to your preferred lender to ask for bridging loans.

Still, you must carefully weigh the risks and benefits, consider market conditions, and have a solid repayment plan before opting for a bridging loan. As with any financial decision, seeking professional advice from mortgage brokers or financial advisors is highly recommended to ensure a successful and smooth property transaction.

Frequently Asked Questions about Bridging Loans

Here are some of the commonly asked questions about bridging loans to help you better understand how they work:

What is the loan term for a bridging home loan?

Bridging home loans typically have short terms, usually ranging from a few months to one year.

Can I access funds for the deposit on my new property through a bridging home loan?

Yes, bridging loans can cover the deposit on your new property, allowing you to secure it before selling your existing property.

Do I need to make repayments during the bridging loan period?

Some bridging loans allow you to capitalize the interest, meaning you would not need to make regular repayments during the bridging period. Instead, the interest is added to the loan balance.

What happens if I can't sell my old property in time?

If you can't sell your old property within the agreed-upon timeframe, you may need to explore alternative repayment options or refinance the loan.

Can I apply for a bridging loan if I have bad credit?

It can be challenging to get a bridging loan with bad credit, as lenders usually require a strong financial position and credit history.

Can I use a bridging home loan for other purposes, like renovations?

Bridging loans are generally designed for purchasing a new property. You can instead ask your lender for other forms of short-term loan like an equity loan to help fund your renovations.

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