What is a bridging loan?
A bridging loan is an additional loan you take out on top of your existing home loan, allowing you to buy a new home before selling your current property.
How does a bridging loan work?
A bridging loan is a short-term financing option that can help you in your journey to buy a new home.
If you already have a home loan and plan to upsize, downsize, or simply move, you would normally have to choose between two options:
- Sell your current home first and arrange an alternative living situation while you hunt for your new property, or
- buy your new property first and pay two mortgages at once – a major financial stretch for many households.
That’s where a bridging loan can help.
A bridging loan is a short-term home loan you can take out, typically for up to 12 months, to buy your new property, which you repay with the proceeds of your current property’s sale. Any debt remaining after you pay off the bridging loan will then transform into a normal mortgage.
During the ‘bridging period’ when you’re trying to sell your old property, you’ll generally only be charged interest on the bridging loan, and interest may be capitalised into the loan. This can help you manage cashflow.
You may be able to take out a bridging loan with your existing lender, or you might need to refinance your current home loan to a new one that offers a bridging loan.
Typically, a bridging loan:
- is a type of interest-only home loan,
- has a limited loan term (usually six to 12 months),
- and carries special conditions, such as the lender being able to charge a higher interest rate or attempt to force a sale if the property is not sold within a certain timeframe.
The way bridging loans are structured can differ between lenders, but most only require you to make repayments on your current home loan until your existing property is sold and the original mortgage is discharged. At that point, the bridging loan becomes your regular home loan and you start making repayments as normal.
Can you get bridging finance pre-approved?
You may be able to get pre-approval for a bridging loan, depending on your financial situation. This may be even easier if you’re applying with your existing lender, as they should have a good idea of your current loan obligations and financial standing.
Having bridging loan pre-approval may help you:
- Better understand your ‘peak debt’: Your peak debt refers to the total amount of money you’ve borrowed from your lender during the bridging period. It’s generally calculated by adding what you need to borrow to buy your new home to the outstanding mortgage on your existing one. By getting pre-approval, you may have a better idea of your maximum peak debt cap earlier, which may help determine how much you can pay for the new property and the minimum price you’re willing to accept when you sell your old one.
- Verify how your bridging loan will work: Since most bridging loan lenders have their own eligibility requirements and ways in which you’ll make repayments, having pre-approval can give you a better idea of how your bridging loan will affect your financial situation.
- Act quickly in a competitive housing market: If you find a new home quickly, you may be able to offer or bid faster and with more certainty if you have pre-approval. Your lender would still need to perform a formal valuation of the new property, but having pre-approval may help cut down on the formal approval turnaround time.
What types of bridging loans are available?
Lenders in Australia generally offer two options: closed bridging loans and open bridging loans:
Closed bridging loans
Closed bridging loans can be entered into if you have a pre-agreed date your property will be sold by. This could be suited to borrowers who have already agreed on the sale terms of their existing property and know what date the contract will settle.
Open bridging loans
Open bridging loans are for those who don’t have an agreed settlement date for the sale of their current property, and instead have a general loan term (typically six or 12 months). This type of bridging loan could be helpful if you haven’t found a buyer for your existing home yet.
Is a bridging loan more expensive than a traditional home loan?
Bridging loans often come with higher interest rates than traditional home loans, as they’re seen to be a riskier form of finance. That said, rates can vary depending on the lender you choose, the loan’s structure, and your financial situation.
A bridging loan will typically cost more in total interest as well, because you’re charged interest on your peak debt. You should also budget for higher loan establishment and valuation fees, as your lender will be assessing two properties as part of the application process.
If you’re set on taking out a bridging loan, it’s important to compare both the interest and comparison rates for the products on offer. The comparison rate takes into account both the interest rate and most loan fees, giving you a better idea of the true cost of a loan.
It’s also important to always read the Key Facts Sheet and Target Market Determination (TMD), as well as other loan documentation, before making a purchase decision.
Can I make extra repayments to pay off my bridging loan early?
You may be able to make repayments towards your bridging loan, but this will depend on your lender’s terms and conditions. Doing so could help to reduce the amount of overall interest you’ll be charged and see you walking away from your transaction with a smaller mortgage. You may also be offered loan features, like redraw facilities or offset accounts, on either your existing or new mortgage that could help you manage the amount you pay in interest.
Things to consider about bridging loans
When considering a bridging loan, it’s handy to be familiar with a few key elements:
- One lender typically provides both loans: When you take out a bridging loan, the lender typically provides finance for the purchase of the new property, as well as taking over the mortgage on your existing one. There could be costs involved with this process, which is largely the same as home loan refinancing.
- During the bridging period, your repayments are likely to change: The repayments could include payments on one or both loans.
- When you sell your existing home, the amount left is called the ‘ongoing balance’, or ‘end debt’: By subtracting the likely sale price of your existing home from your peak debt, you’ll be left with the ‘ongoing balance’ – the overall balance of the new loan.
- After you sell your home, your loan will revert to another product: The lender will likely require the bridging loan be converted into another type of loan – such as a variable rate home loan – when you settle the sale of your original house.
- Your repayments will probably be different on the new loan: Your new repayment amount will probably be different to your repayments before moving home and to repayments made during the bridging period.
What are the requirements for a bridging loan?
A few requirements may apply to bridging loans that wouldn’t apply to other home loans. Depending on the lender and specific product you choose, some of the criteria that could apply includes:
- Maximum loan-to-value ratios (LVRs): This may mean you need a deposit of a certain amount or a minimum level of equity, such as 20% of the peak debt, in order to get a bridging loan.
- Maximum loan terms on the bridging loan: This could mean your current home would need to be sold within six to 12 months. If it’s not, you may be charged a higher interest rate, be asked to make repayments on the bridging loan, or your lender might force you to lower the price you’re willing to accept for your existing property.
- You may not be allowed to use certain loan features: The bridging loan might not allow you to use features like a redraw facility or offset account during the bridging period.
Bridging loans may also not be available for company or strata title purchases.
Who’s eligible for a bridging loan?
To be eligible for a bridging loan, you’ll generally need to:
- Meet your lender’s criteria, which includes providing details on your income, debts, and expenses. This may be a smoother process if you’re taking out a bridging loan with your current lender.
- Have your current home listed and available for sale.
- Have at least 20% of the bridging loan’s peak debt in existing equity in your current home (LVR of 80% or less) or provide a deposit to make up the shortfall.
- Have your current home professionally valued.
Your bridging loan provider may have additional eligibility criteria you need to meet, so it’s important to have a thorough conversation with the potential lender before applying, or seek professional financial advice.
Pros and cons of a bridging loan
Pros
- Convenience: Bridging loans could help you buy your new property straight away, without having to wait for your current home to sell.
- Potential to avoid paying two sets of repayments: Depending on how your loan is structured, you may only need to make repayments on your current mortgage during the bridging period.
- Potential to avoid renting: If the timing is right, it could be possible to avoid the cost and hassle of having to rent a home in the period between the sale of your existing home and settlement of your new one.
Cons
- Risk of cost blowout: If you don’t sell your home in the required time, you could be left with a large interest bill, or risk the bank stepping in to sell your home. If your property sells for less than you expect, you might also be left with a larger ongoing loan amount, which could risk putting you into financial difficulty. It could pay to have a back-up plan.
- Potential expense of two loans: Bridging finance may require two property valuations (your existing property and the new one), which could mean two sets of valuation fees, as well as other fees and charges related to the extra loan.
- Potential interest charges: As with any loan, the longer it takes you to pay off a bridging loan, the more interest you’ll be charged. If you have trouble selling your property, you may pay more interest on your bridging loan than you planned, and this may be capitalised, meaning you could pay interest on interest. In addition, if you don’t sell your existing home within the bridging period, your loan will typically revert to a higher interest rate.
- Potential termination fees: If your current lender doesn’t offer a bridging loan, you’ll need to switch and refinance, which may result in early exit fees from your current loan (especially if you’re switching during a fixed interest rate period).
Can I build a new home with a bridging loan?
You can generally use a bridging loan when building your next home, however you’ll usually only be given up to 12 months to finish the build and sell your existing home. If you face building delays that push the new home’s handover to past your bridging period, your loan may revert to a higher interest rate or you could be forced to start making repayments on the bridging loan.
What are some alternatives to a bridging loan?
A bridging loan may not be your only option when buying a new home before selling your existing one. Other solutions could include:
- Altering the purchase contract: Depending on your circumstances, it might be possible to add a ’subject to sale’ clause in the contract for your new home. This means the contract wouldn’t become unconditional until you sold your existing home. Consult a qualified professional before considering this option.
- Negotiating a longer settlement period: A longer settlement on either your existing home or your new home (or both) could allow you extra time to organise your move and your finances.
Is a bridging loan right for me?
Bridging finance may not be available or suitable for everyone. Lenders often require you have a certain amount of equity in your existing home and you’ll need to be confident you can sell your existing property in a reasonable timeframe.
Due to the power of compounding capitalised interest, the longer it takes you to sell the old property, the more interest will accrue on the bridging loan, and the more you’ll have to pay in the future.
The length of the bridging period, which is usually six months to 12 months, should be taken into account as well. Lenders typically include conditions in the loan allowing them to charge a higher interest rate, force you to start making repayments, or make you accept a lower offer if you don’t sell your property within the stated time frame
It’s important you understand the loan and its conditions, and read any relevant information – such as the TMD and Key Facts Sheet – before signing on the dotted line. Consider seeking suitably qualified financial and legal advice as well.
Tips for people thinking about a bridging loan
Bridging loans can be helpful, but should be approached with a healthy dose of caution, since you’re essentially paying interest on two loans at once, says Canstar’s Data Insights Director, Sally Tindall.
“Spend some time exploring the alternatives. Can you ask for an extended settlement on the new property to give you time to sell your current home? Is it worth putting your house on the market first, to give you a clearer idea of how long it will take to sell and how much it’s likely to sell for?
“These types of loans are typically interest-only and usually run for a maximum of 12 months, sometimes at higher-than-normal interest rates.
“A shift in the market dynamics could also throw a spanner in the works and add to the time it takes to sell your existing property, stretching from days to weeks and potentially even months.”
Ultimately, she says to do the maths on each option before making a binding decision.
Some of Sally’s tips for people who decide they need a bridging loan include:
- Make sure you have a solid amount of equity in your current home to support the financing.
- Shop around to understand your options. Find out what rates and fees your existing lender will charge, but see if others will offer you a decent rate. Your options could be limited, as some lenders offer bridging loans to their existing customers but not to new ones.
- Get a valuation of your existing property and be realistic about how much you can sell it for.
- Have a back-up plan in case your home doesn’t sell as quickly as expected.
