What is a Bridging Loan?

How do Bridging Loans work? 

A bridging loan is a short-term solution that helps you bridge the gap between buying a new place and selling the old one. It hangs out with your regular mortgage as you’ve got two loans during this “bridging period”.  

Bridging Loans can also come with some special features:  

• They’re usually interest-only, meaning you’re just covering the interest, not the principal, for a limited time.
• The loan amount is worked out based on the equity you’ve got in your current property.
• There’s a time limit, and if your old place doesn’t get a new owner within a set timeframe, then the lender might raise your interest rate or step in to sell your home. 

But here’s where it gets interesting. Different lenders play by different rules. Some let you chill and only pay the original loan until you settle into your new spot. During this bridging period, the interest on the bridging loan stacks up. Once your old pad is sold and the original mortgage is history, you start paying off the principal of that bridging loan plus the added interest. 

Now, others might be a bit stricter, making you juggle payments on both loans from day one. When your old home is finally off the market, the original mortgage waves goodbye, and the bridging loan usually transforms into your brand-new mortgage for the swanky place you just snagged.  

Keep in mind though, you’ve got a ticking clock. If the market isn’t in your favour, you might end up selling your old pad for less than you hoped just to check all the boxes on your bridging loan journey. So make sure you do your research before taking the plunge! 

Who typically takes out Bridging Loans? 

Bridging Loans are a bit like playing musical homes, and not everyone’s up for the game. Typically, you’ll find families and homeowners itching for an upgrade – they’ve outgrown the old place and want something more spacious or desirable.

For example, meet Dani. She’s got a cosy little home, but her family has grown, and they’re feeling a bit cramped. Now she’s eyeing a bigger house that just hit the market—the problem is she hasn’t found a taker.

Enter the Bridging Loan. Dani’s not one to sit around waiting for her old place to sell; she wants that dream home ASAP. So, she gets a bridging loan, allowing her to snatch up the new home while her real estate agent works their magic to get the old one sold.

Now even though bridging loans come with a price tag—so they’re not for everyone—Dani has some breathing room. She’s been building up equity in her current place, and she’s got the funds to handle the extra costs that come with bridging loans—think fees for valuations and whatnot.

Dani knows there’s a chance her old place might not fetch the price she’s dreaming of. But she’s calculated the risks, made sure to have at least 50% equity in her existing home, and she’s braced for whatever curveballs might come. That’s the thing about bridging loans –they can be your ticket to that dream home if you’ve got the equity and the stomach for it. But it’s crucial to know when the finances don’t quite stack up for your situation.

What are the pros of Bridging Loans? 

What are the cons of Bridging Loans? 

How do I qualify for a Bridging Loan? 

Different lenders will usually have different requirements. Most of them will typically require the following: 

• Your home equity
• You may require a deposit to qualify.
• Your home may need to be sold within 6-12 months
• You need to prove that you have the financial capacity to repay the bridging loan 

When is the best time to take out a Bridging Loan? 

With bridging loans, timing is everything.  

When the interest rates are on the lower end of the spectrum, that’s your cue to consider a bridging loan. Since these loans are interest-only, a lower-interest environment is like catching a wave that won’t wipe you out financially. It keeps the costs in check, making the whole bridging adventure a bit more budget-friendly. 

On the flip side, beware of high-interest environments. In these situations, the cost of your bridging loan can skyrocket if your property sale faces delays or the real estate market takes a bad turn.  

Stability is the name of the game. Typically, the best time for a bridging loan is when the real estate market is calm. If you can predict a smooth property sale, you’re set for a more predictable and cost-effective journey. If your bridging loan aligns with the timing of your property sale, there’s a better chance of your old house flying off the market, and you can smoothly transition to your new abode. 

What are some alternatives to Bridging Loans? 

It’s important to keep in mind that a bridging loan isn’t the only card in the deck. Here are some alternatives to consider: 

Additional Home Loan 

Let’s face it, the time limit and (generally) higher rates on a bridging loan can be cause for stress. However, if you have the funds for a deposit, taking out an additional home loan might be an option. This means securing a separate loan for the new property while keeping your existing mortgage intact. 

Using Home Equity (Line of Credit Loan) 

Another savvy move is tapping into your home equity. With a line of credit loan, you can use the equity built up in your current property to finance the purchase of the new one.  

Deposit Bond 

You provide a deposit bond instead of forking over a cash deposit when signing the contract for your new home. It’s like a guarantee to the seller that the cash will be available at settlement. This way, you can delay the cash outflow until your existing property is sold. 

Add Some Helpful Clauses 

For the strategic negotiators out there, consider tweaking the purchase contract. Add a “subject to sale” clause, making the contract for your new home conditional on the sale of your existing one. It’s putting a safety net in place, ensuring you don’t commit fully until your old place finds a new owner. 

Negotiating a Longer Settlement Period 

Extend the timeline by negotiating a longer settlement period for your new home. This grants you extra breathing room to sell your existing property before diving into the financial commitment of the new one.  

Where can I find and compare Home Loans? 

After sorting through all these potential loans and fees, ready to start looking at bridging loans? We’ve partnered with Lendi to help you compare Home Loans with over 25 lenders. Give it a try today!