Bridging Loans and Bridging finance, explained.

If you want to buy a new property, but have not yet sold your current home, you may be in need of a bridging loan, or bridging finance. What is a bridging loan or bridging finance?

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The funds from bridging finance, or a bridging loan, can be used to temporarily fund a property purchase. When you sell your existing home, you use the funds to pay off the bridging loan.

It means that, if you fall in love with a new property, but you still own your own house or are repaying a mortgage, you may be able to put in a winning offer without having to wait to sell your current home.

The period between buying your new property and selling your existing property is called the bridging period, and lenders can provide financing to help you secure the new property, otherwise known as bridging finance.

The funds from selling your existing property will then help pay off the bridging loan.

Some lenders may also provide bridging finance to fund building a new residence, while you are still living in your current home.

How does bridging finance work?

The amount you can borrow on a bridging loan is determined by the amount of equity that you have in your current property.

Generally, the bridging term will be available for between six months to a year.

Can I get bridging finance to build a house?

Some lenders will consider approving a bridging loan if you are building a property, but there will be conditions. For example, if construction is completed within an agreed time like 6 months, after the loan is funded.

What is ‘Peak Debt’?

The lender will calculate the mortgage outstanding on your existing home and add that to the purchase price of your new property. This gives a figure called the ‘Peak Debt’.

As the name suggests ‘Peak Debt’ is the highest amount of debt that you will be in during the bridging period, and this is used to determine how much you can borrow.

How much can I borrow?

This varies between lenders but is generally about 80% of your peak debt. It is possible to borrow more than this at times, but the qualification criteria will be harder and you may have to pay Lenders Mortgage Insurance.

Importantly, lenders will often discount the projected sale price of your current home by around 15%. This is called a ‘Fire Sale’ Buffer and can affect how much you can borrow. So, it’s worth bearing in mind when considering bridging finance.

What are some of the benefits of bridging finance?

  • No waiting to buy a new property. Bridging finance can make the difference between you securing a property or missing out. You don’t have to go through the prolonged rigmarole of selling your existing property before making an offer on a new one.
  • Save the cost of moving, renting and moving again. With bridging finance, you can stay in your current home until you are able to move into your new one.
  • Standard interest rates. These days, a lot of lenders charge standard variable interest rates for bridging finance.
  • Standard fees and charges too. Application fees and other charges are comparable with a standard home loan. There are typically no ‘early repayment’ penalties either.
  • You can make extra repayments to reduce your interest paid. Generally, lenders will allow you freedom to make as many principal and interest repayments as you like, without paying any penalties.

Are there any downsides to it?

There are some possible downsides to taking out a bridging loan, but by planning carefully and being able to sell in time and make your repayments, most of them can be avoided. Here are some to bear in mind.

  • You need to pay for valuing your current home as well as your new one. This isn’t a massive cost but still adds between $200-$300 extra you’ll need to pay.
  • Interest hike if you don’t sell in time. Some lenders will raise the interest rate if you have not sold your existing property within the bridging period. You may also be required to start making principal and interest repayments on the peak debt amount. This can get expensive at a difficult time. It’s good to feel confident that you will be able to sell within the bridging period.
  • The longer it takes to sell your home, the more interest you’ll pay. Interest compounds monthly, and so the longer you have the loan, the more the interest will accrue.
  • Extra repayments, but no redraw. Being able to pay more off your loan is a benefit, but be aware that you won’t be able to redraw the money once it has been paid in.
  • If you sell for less than expected, you’ll end up with a bigger home loan. If the sale of your existing house does not meet the valued amount, then the outstanding sum could be added to your home loan, and you could be expected to pay principal and interest on that total.

Is bridging finance expensive?

Bridging finance generally comes at the same sort of fees and interest that you’d expect from a normal loan, though this does vary between lenders and according to your personal circumstances.

As mentioned earlier, you will probably have to pay for two property valuations, but that is a one-off cost.

How can I avoid any unforeseen expenses?

There are a few measures you can take which should help you avoid the pitfalls which could incur extra expense and lead to financial stress. Here are some things to consider:

  • Be realistic about the value and sale price of your existing property. If you over-value your existing property and sell it for less, then you’ll be left with more debt than you wanted. So get your property valued accurately before you apply for a loan.
  • Be realistic and include settlement time when selling your property. Settling a property can take up to 3 months in some states, so make sure that you account for that time on top of being realistic about how long your property will take to sell. Local agents should be able to give you a good idea.
  • More equity means less interest. It’s a good idea to have at least 50% equity in your current home, this will help you avoid large interest payments.

What if I can afford to pay principal and interest on both my existing and my new home loans?

If you can comfortably afford to pay both loans while you wait to sell your current home, then you probably don’t have to worry about taking on a bridging loan. Especially as, in some circumstances, a bridging loan may come at a higher interest rate than your existing loan.

How do I apply for a bridging loan?

As well as the usual evidence of income and ability to repay the loan, you will need to secure your bridging loan with property, in the same way that your home loan is secured with property.

So, if you think bridging finance could be right for you, maybe it’s time to start looking around and comparing from a range of lenders and rates. For more information, you can talk to one of Lendi’s home loan specialists 1300 186 260 (08:30-18:30).

Last updated: 15/03/2022