Bridging Loans for Australian Homeowners

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    What is a bridging loan?

    Buying and selling real estate can be a huge financial headache, particularly if you are both buying and selling at the same time. Unfortunately, many homeowners find themselves in this exact situation.

    It’s easy to feel stuck. If you sell the old house first, you now have nowhere to live; if you buy the new house first, you’re now paying for two mortgages. To solve this dilemma, many Australians take advantage of a bridging home loan which helps smooth the transition.

    A bridging loan is a type of short-term home loan that provides funds for you to buy a new home while still in the process of selling your existing home. This will be an additional loan on top of your existing home financing. The size of a bridging loan is usually based on the equity you hold in your existing property.

    Bridging loan terms are typically 6 months, though they can go to 12 months if the new property is still being built. These loans tend to be interest-only, and at the end of the term, you can pay off the principal using the money from your home sale.

    How do bridging loans work?

    When you apply for a bridging loan, you are combining your pre-existing mortgage with the new home loan. This combined amount is called a peak debt, which includes the old loan, the new loan, and any applicable stamp duties and legal fees. You typically pay interest on the entire amount.

    Then, once the old property is sold, you use those proceeds to make a large payment towards your peak debt. The old loan will be closed out, and any remaining amount on your new loan will become your new regular mortgage.

    Example of a bridging loan in action

    Since bridging loans have several steps, let’s consider an example.

    Joseph owns a home worth $600,000, and he has a $200,000 mortgage remaining on it. He wants to buy a new home that costs $750,000, but he’s worried that someone else will snatch it up first.

    Joseph sets up a bridging loan in the amount of $950,000 (the sum of his old mortgage and the new purchase price). This is his peak debt. Joseph makes interest payments on the $950,000 bridging loan.

    A few months later, Joseph sells his old home for $600,000. This money goes towards his bridging loan. The old loan component ($200,000) is paid off first, and the remainder ($400,000) goes to the new loan component.

    Joseph’s peak debt of $950,000 has now been reduced to $350,000. This remainder becomes his new conventional mortgage.

    What kinds of bridging loans are available?

    Bridging loans break down into two main categories: closed and open.

    Closed bridging loans:  These loans are used when the sale deal for your old home is already finalised for a specific future date.

    Open bridging loans: These loans are used when you have not yet sold your home, and give you 6-12 months to make the sale.

    What are the debt options for a bridging loan?

    One of the main factors to consider for a bridging loan is the debt present at the conclusion of the loan. Some bridging loans will have end debt, and others will not.

    With end debt: If you’re moving to a more expensive property, the proceeds from your prior home’s sale might not be enough to cover your new home’s cost. This means that you will still have debt remaining at the end of the bridging loan.

    Without end debt: If you’re moving to a less expensive property, the proceeds from your prior home’s sale could potentially cover the entire cost of the new home. This means that you might not have any remaining mortgage debt.

    Pros and cons of bridging loans

    Bridging loans are a great option for many people, but like any financial transaction, they inherently carry some degree of risk.

    Pros of bridging loans

    There are several advantages to taking out a bridging loan

    • Locking down your dream home: Houses come on and off the real estate market all the time. If your ideal property is available, a bridging loan helps you secure the purchase without having to wait for the sale of your old home.
    • Making flexible repayments: Over the course of the bridging period, many lenders will let you make interest-only payments. You’re also only managing one loan payment instead of two, which frees up cash while you wrap up the sale.
    • Avoiding renting or hotels: Finding temporary housing is a common source of stress when moving between houses. A bridging loan provides the funds for a more seamless transition between homes and creating a more flexible schedule.
    • Consolidating extra costs: Instead of being hit with several individual fees and duties, it’s usually possible to wrap these into the bridging loan. However, this depends on the property value and your home equity being sufficient.

    Cons of bridging loans

    There are also several potential disadvantages to taking out a bridging loan:

    • Risks with selling the old home: A bridging loan usually lasts just 6 to 12 months. If the housing market takes a downturn, you might be forced to sell for less than expected, and not be able to meet your planned repayment.
    • Administrative origination fees: When you take out a bridging loan, you’ll likely need two property valuations (the old home and the new home), and you can expect some lender fees for creating and maintaining the loan itself.
    • Accumulating interest rates: The longer it takes to sell your old property, the more interest accrues. Plus, if you don’t wrap up the sale inside of the bridging period, your interest rates will typically jump to a higher percentage.
    • Fewer additional loan features: Bridging loans rarely come with a redraw facility for early repayments, and the short loan term makes them pretty rigid. You’re unlikely to get the same add-on features that a typical mortgage has.

    It’s very important to ask your prospective lender or mortgage broker about the terms, conditions, and applicable fees of any loan you apply for.

    Alternatives to bridging loans

    If a bridging loan doesn’t feel right for you, there are some other pathways available to help ease the process of selling your home and buying a new one.

    Revising the purchase contract: In some cases, you could add a “subject to sale” clause on your new home purchase, making it conditional on the sale of your old home. This does run the risk of losing the new home.

    Negotiating a longer settlement period: If you’ve begun committing to a home purchase but don’t have funds available, you could ask to extend the settlement period. This gives you extra time to sell the old home.

    Getting a secondary home loan: If you can’t rely on selling your old home, you can take out a second loan to cover the missing cost of buying the new home. This will mean having to manage two mortgage payments.

    Bridging loans FAQ

    Do I need a deposit for a bridging loan?
    Yes, you will usually need a deposit of around 20%, but this can be either in cash or in home equity from your current property. The 20% deposit threshold is important for avoiding a lender’s mortgage insurance requirement.
    What is the maximum that I can borrow with a bridging loan?
    Lenders will decide your loan amount maximum based on your income, assets, credit score, and home equity. When valuing your old home, many lenders will reduce the estimated value by about 15% as a buffer.
    Do my old loan and new loan have to go through the same lender?
    Yes, in order to do a bridging loan, both pieces must come from the same lender. If you don’t like your current lender, you can refinance your old home, and then set up a bridging loan with the new company.
    How long does it take to get a bridging loan approved?
    This depends on the complexity of your financial situation. Many bridging loans are approved within 1 or 2 weeks, but some can take as long as 4 weeks.

    Final thoughts on bridging loans for home purchases

    Staying on top of one home loan is challenging enough, but staying on top of two home loans at the same time can feel impossible. To address this, many lenders offer bridging loans that help stabilise your finances in between selling your old home and buying your new one. Becoming more educated about bridging loans is a smart move for every homeowner, and can save you substantial amounts of money, time, and stress.