Written by If you’re selling your current home to purchase a new one, timing the sale and purchase can be challenging. Ideally, you’ll want the sale of your property to go through in time to transfer funds to your new purchase. After all, not many of us can afford the repayments on two mortgages at the same time. However, if delays do happen, a bridging loan could help you secure your new home while waiting for your old one to sell.
What is a bridging loan?
A bridging loan is a short-term financing solution designed to help you transition between selling your current home and purchasing a new one. It acts as a financial ‘bridge’, covering the gap between needing funds for your new property and receiving proceeds from the sale of your old one. This type of loan is ideal for those who lack sufficient equity or cannot manage repayments on two principal and interest mortgages simultaneously.
When you take out a bridging loan, lenders typically combine the balance of your existing mortgage, the purchase price of your new property and associated costs such as stamp duty and legal fees into a single loan amount known as peak debt. For example, if your current home is worth $500,000 with $150,000 outstanding on the mortgage and you buy a new home for $600,000, your peak debt would be $750,000.
Bridging loans are temporary arrangements, typically only lasting for up to 6 to 12 months. Once your old property is sold, the net proceeds go toward reducing the peak debt. The remaining balance, called the end debt, transitions into a standard home loan with potentially different terms and interest rates.
There are two types of bridging loans:
- Closed bridging loans, which are based on a fixed settlement date, such as if you’ve already signed a contract for the sale of your property.
- Open bridging loans, which do not have a set settlement date but are limited to a set term.
Bridging loans can also fund the construction of a new home while you stay in your current one, providing flexibility for various scenarios.
How much will a bridging loan cost?
Bridging loans can offer a safety net when purchasing a home, but their cost structure can be complex and differs from traditional home loans. To ease financial pressure, during the bridging period your mortgage repayments are typically either:
- Reduced, which usually means paying interest only.
Or
- Suspended, which allows you to defer all payments until your current property. However, unpaid interest is added to your total (peak) debt and compounds daily – meaning you’ll be charged interest on your interest.
It’s also important to know that bridging loans often come with higher interest rates than standard home loans, as they involve more risk for lenders. Additional costs, such as valuation fees, legal fees and administrative charges, can also apply.
Let’s look at an example. Imagine you have a $300,000 mortgage on your current home, and your new property costs $600,000. Your peak debt is $900,000. If repayments are suspended, the interest accrued on the full $900,000 will be added to your end debt, which you’ll repay through a regular home loan once the bridging loan ends.
Do I need a deposit for a bridging loan?
In most cases, you won’t need a cash deposit to secure a bridging loan, but you will generally need sufficient equity in your current home. Lenders typically require a loan-to-value ratio (LVR) of 80% or less, meaning your equity must cover at least 20% of your total peak debt.
For example, if your home is worth $500,000 and you owe $150,000 on the mortgage that means your equity is $350,000. This is the portion of the home that you have paid off and which belongs to you. You can use this $350,000 equity as a deposit on your new home.
If your equity falls below the required threshold, some lenders may allow a bridging loan with a smaller deposit, but this often comes with additional costs such as lender’s mortgage insurance (LMI).
Will I qualify for a bridging loan?
Qualifying for a bridging loan can be more challenging than for a standard home loan, as it comes with stricter requirements. As well as meeting standard home loan criteria, when you apply for a bridging loan, the lender will also look at:
- Home equity: lenders will generally require you to have built up a certain amount of equity in your current property to secure a bridging loan. The more equity you have, the better your chances of approval and the higher your borrowing capacity.
- Loan serviceability: this is your ability to manage the loan during the bridging period. Lenders will evaluate your income, expenses, existing debts and overall financial situation. You must demonstrate that you can handle repayments on both your existing and new loans, plus the interest on the bridging loan.
- Credit history: a good credit record is typically required for bridging finance. Lenders use this to assess your reliability in managing debt.
Not all lenders offer bridging loans and eligibility criteria can vary significantly between those that do, so it’s important to compare your options to find the one that best suits your needs. If you plan to switch lenders, note that most bridging loans require financing both your old and new properties with the same lender, as the two loans are linked. However, this doesn’t mean you’re locked into your current lender – you could refinance with another provider and consolidate both loans with them. Be aware, though, that switching lenders may incur additional fees, so it’s essential to weigh up the potential costs and benefits before making a decision.
What happens if I can’t sell my old home within the bridging period?
If your bridging loan expires and your old home hasn’t sold, your lender will typically revert to standard mortgage repayments. This means you'll be responsible for repayments on both your current mortgage and the bridging loan, which can put a significant strain on your finances.
In some cases, lenders may increase the interest rate on your loan as a penalty, further adding to the financial pressure.
Other lenders take a more hands-on approach and will take over the sale of your old property. Because they are looking to recoup their money quickly, they may choose to sell the house for less than its market value. This means you’ll have less money to pay off your peak debt, and you are left with a higher end debt that still needs to be paid after the bridging loan is settled.
What other options do I have when buying my next home?
Coordinating settlement dates between selling your current home and buying your next can be tricky. Bridging loans can be a convenient solution but might not be right for your circumstances. Other options can include:
Short-term solutions: other than renting a property, in the short term you could:
- Negotiate a longer settlement period: request an extended settlement on your sale to give you more time to find a new property and avoid the stress of moving twice.
- Rent back your home: enquire about whether you could rent your current home from the buyer after settlement, giving you extra time to secure your next property.
- Stay with family: temporarily move in with family while placing your belongings in storage to save on rental costs as you search for a new home.
Second mortgage: if you have more than 20% of the value of your existing home as free equity and can afford to make the repayments on two mortgages concurrently, a second home loan may be a viable option for you. Once your old home is sold, the mortgage on that property can be discharged and the remaining funds can be put towards paying down your second mortgage. However, be aware that you may face higher rates and fees, as well as a lower maximum LVR.
Loan portability: porting involves keeping your existing mortgage and transferring it to your new home. This process is sometimes referred to as a ‘substitution of security’. Under this arrangement, you simply transfer or ‘port’ your home loan from one house to the next, keeping all your remaining details such as loan size and term the same. If you’ve not yet found a new home, you may have the option to choose a ‘deferred settlement’. When the sale funds from your former home come through, they’re placed in a term deposit, which your lender will use as the security for your home loan to keep it open for up to six months while you find your new home to buy. Once you’ve signed up to buy your new home, the term deposit is closed and the mortgage transferred to your new home.
The pros and cons of bridging loans
The types of Home Loans
Helpful guides on home loans
Get a home loan quote today
Explore your home loan options if you are looking to buy, refinance or invest in property and find competitive rates through Savvy.
