Selling your home and buying a new property at the same time can be a little tricky. It can sometimes take a while to sell your home, leaving you without the sales proceeds to buy your new property.
With a bridging loan, you can avoid the stress of matching up settlement dates, move quickly to buy your new home and give yourself more time to sell your existing property.
How do I qualify?
- You need the equity: There is no hard and fast rule but it’s recommended you have more than 50% in equity to make the bridging loan worthwhile.
- You have to meet standard serviceability requirements: This includes providing evidence of your current income, employment status, expenses and other supporting documents as if you were applying for a standard refinance.
- Bridge term of no more than 6 months for buying an existing property: Bridging term extensions are available on a case by case basis.
- Bridge term of no more than 12 months for buying a new property.
- Unconditional sale on existing property: Contracts need to have already been exchanged on your existing property before you can get approved for a bridge loan.
If you need a bridging loan, please call us on 1300 889 743 or complete our free assessment form and we can tell if you qualify.
How much can I borrow?
- Borrow up to 80% of the peak debt: Peak debt is the purchase price of the new property plus your current mortgage.
- Interest payment and fire sale buffer may be added: Lenders will normally add a 6 month interest rate buffer when assessing your ability to pay off the bridging loan. They’ll also discount the projected sale price of your existing property by around 15%, otherwise known as a “fire sale’ buffer. This can have an impact on your borrowing power.
How does it work?
A bridging loan is basically finance that allows you to buy a new property without having to sell your existing property first.
Banks work out the size of the loan by adding the value of your new home to your existing mortgage then subtracting the likely sale price of your existing home. This requires a valuation by the bank which will cost about $200 to $220.
What you’re left with is your “ongoing balance” or “end debt” which represents the principal of your bridging loan. Banks will assess your ability to make mortgage repayments on this end debt.
Lenders use both properties as security and you’ll have one loan (peak debt) to cover both the existing debt and the new purchase.
Between when your bridging loan is advanced until you sell your existing home, most lenders capitalise interest-only repayments on the peak debt which means that you’ll only have to worry about continuing to make principal and interest (P&I) on your current mortgage, rather than trying to manage repayments on two home loans.
After your property is sold, you simply continue to make normal home loan repayments, plus the compounded bridge loan interest, on the new loan.
Why would you ever need one?
The main purpose of a bridging loan is to “bridge” the finance gap so you can buy your new property before you find a buyer for your property. Ideally, you’ll want to sell your property first before buying a new property but sometimes you need to act fast to buy and you can’t wait 2,3 or even 6 months for your home to be sold.
This is not so much an issue in most capital cities where it doesn’t take long for properties to be snapped up. Bridging loans are more beneficial in suburbs/locations where properties tend to stay on the market for longer and are more difficult to sell.
You should find out what clearance rates are like in your area to get a better idea of how long it’ll likely take to sell your property. Alternatively, speak to a mortgage broker about your property purchase plans.
In the real world, a vendor isn’t going to wait for you to sell your property. They’ll simply sell to someone who’s ready to buy so without the ability to move quickly, your dream property can easily slip through your fingers.
If you set a realistic time frame to sell your property with a realistic price estimate based on a proper valuation, bridging finance can give you time to sell your existing property rather than having to rush and possibly missing out on getting a better price.
Apart from buying an existing property, bridging loans are a great option if you want to stay in your current property while you build a new property. It saves you the hassle and cost of having to selling your property and stay in a hotel or rent somewhere short-term, not to mention having to pay for the costs of moving twice.
What are the pros?
- You can buy your new property right away: You don’t have to wait to get a loan.
- It gives you time to get a better price on your property: You can avoid the stress of having to sell your property quickly. By taking the time, you may be able to get a better price for your property.
- Interest-only repayments which are capitalised on your peak debt: Your bridging loan repayments are usually ‘frozen’ during the bridging term until you sell your existing home. You’ll only have to keep paying your current mortgage and not have to worry about managing two home loans.
- Banks charge standard interest rates: In the past, banks charged a higher interest rate for bridging loans but now there are some lenders that charge standard variable interest rates.
- The same fees and charges as a standard home loan: Application fees (usually around $600) are the same and you don’t have to worry about break costs or discharge fees for paying the loan off quickly. Keep in mind that most lenders won’t generally approve a bridging loan if you’re likely to sell the property in less than 3 months.
- You can make unlimited P&I repayments: To reduce your interest bill, you can actually choose to make as many repayments on the bridging loan until you sell your property.
- Avoid the costs of renting and moving twice: Sometimes renting and having to pay for the costs of moving twice may be a better option than getting a bridging loan. It’s important to speak to a qualified mortgage broker so they can help you do the sums to find out which option is better for your situation.
What are the cons?
- Interest is compounded monthly: Although the interest is capitalised on top of the peak debt, the longer it takes to sell your property, the more your loan will accrue interest. Interest is compounded on a monthly basis.
- You need to pay for two valuations: This will be a valuation of both your existing property and the new purchase and cost between $200-$220.
- Higher interest rate if you don’t sell the property in time: If you don’t sell your existing home within the bridging period, a lot of lenders will charge a higher interest rate. Many will also require you to start making principal and interest repayments on the peak debt in order to service both loans. This can cause financial stress.
- No redraw facility: If you choose to make repayments during the bridging term but need to redraw for any reason, you won’t be able to do so.
- Normal early termination fees will apply if switching lenders: If your current lender doesn’t offer a bridging loan product, you’ll have to go with another lender that will likely insist on taking on the entire debt (your existing mortgage plus the bridging loan). Because you’re switching lenders, you may be liable for early termination fees and break costs particularly if you’re switching during a fixed interest period.
Are all bridging loans the same?
There are two main types of bridging loans: closed bridging finance and open bridging finance.
Closed bridging loans
This is where you agree on a date that the sale of your existing property will be settled and you can pay out the principle of the bridging loan.
This type of bridging loan is only available to homebuyers who have already exchanged on the sale of their existing property. Sales rarely fall through after the exchange so lenders tend to see them as less risky.
Open bridging loans
This is for people who have found their perfect property but don’t have an exact date to exit the bridging finance because they haven’t put their existing home on the market yet.
Lenders tend not to like these types of arrangements.
In cases like these, lenders are likely to ask a lot more questions and will want to see the details of the new property and proof that your current home is being actively marketed.
You’ll need a significant amount of equity in your current property and an exit strategy in case the sale falls through.
Do you need a deposit for a bridging loan?
Bridging finance isn’t covered by Lenders Mortgage Insurance (LMI), a one off premium charged when borrowing more than 80% of the value of a property. That means you need around at least 20% of the peak debt as a deposit in order to buy the new property.
Because you haven’t sold your existing property yet, you’ll need to have this amount as savings that you’ve accumulated over 3 months, which can be quite difficult to do when you’re currently making mortgage repayments.
One alternative is to apply for a deposit bond, a guarantee from an insurance company to the vendor that you will complete the purchase. You can apply for one as soon as you get formal approval from the lender.
A deposit bond costs you around 1.2% of the amount of the deposit as a once off fee. A bond for a 20% deposit on a $600,000 property, for example, will typically cost around $1,440.
There are certain conditions you need to meet for a deposit bond so please check out the deposit bond calculator page for more information.
Can I get a bridging loan to cover construction costs?
Most lenders won’t approve a bridging loan to cover the costs of building a property.
Some lenders will consider approving a bridging loan if construction is completed within 6 months of the date of the first advance (to cover the first progress payment) and the sale of your home is settled on or before 6 months after the date of the final progress payment.
This brings the total bridging term for construction to a maximum of 12 months.
Repayments are required for both your current mortgage and the new loan but you have 12 months, instead of 6, to sell the property.
There are a few lenders that offer this type of bridging loan finance so please complete our free assessment form to find out if you can get approved.
What else do you need to consider?
One of the biggest issues in bridging finance is that the borrower may overestimate the likely sale price of their existing property and fall short of the amount required to pay out the bridging loan.
The other major problem is not being able to sell your property within the bridging period.
In addition, interest on the bridging loan will be capitalised on your peak debt and will compound monthly until the sale is complete and will cause your peak debt to increase. Keep in mind that you will only be able to capitalise repayments if you meet total Loan to Value Ratio (LVR) requirements set by the lender, which is usually capped at 80% of the peak debt.
Most lenders offering bridging finance do so on the condition that there will be an end debt.
In cases where there won’t be an end debt, such as downsizing your home, the fees associated with your loan may be higher.
Remember these golden tips
- Get a proper valuation of your existing property and be realistic about how much you can sell it for.
- It’s recommended that you have at least 50% in equity in your existing property to avoid having to pay a large interest bill.
- Be realistic in how long it will take you to sell your property. What is the market like where you live? Also, take into account the time it takes to reach settlement (6-8 weeks in some states).
- It’s recommended that you make some repayments during the bridging period in order to minimise the interest and overall peak debt.
- Can you temporarily move back home or stay at a friend’s house, rent-free? You should consider placing short-term tenants in your existing property to help keep your interest costs covered while you’re trying to sell.
What are the alternatives to bridging loans?
Are you better off selling your existing property first and renting before committing to a new property? That will depend on what the property market is like in your area.
It will also depend on the size of your mortgage and how much interest you’re paying compared to how much you would likely be paying in rent if you’re unable to sell your existing home before purchasing a new property.
One of our helpful brokers can help you to estimate the costs of bridging finance versus these alternate options.
What you might like to do is to negotiate with the vendor (via your solicitor) about extending settlement if you haven’t sold your property yet.
Not sure what to do?
One of our mortgage brokers can properly assess your situation to let you know which option will provide the most benefit to you.
Call 1300 889 743 or complete our free assessment form today.
Let’s say that you have a $500,000 property with $200,000 owing on the mortgage and you want to buy a new home worth $700,000 plus $35,000 to cover the costs of stamp duty, legal costs and mortgage application fees (these extra costs are just an example and will vary depending on the property, size of the loan and lender).
This brings the cost of buying the new property to $735,000.
You live in a slow property market and you haven’t been able to sell your home yet so in order to buy the new property, you need a $935,000 bridging loan.
This loan amounts to your existing $200,000 mortgage plus the $735,000 for the new purchase. This is known as your peak debt.
To qualify for the bridging loan, you need 20% of the peak debt or $187,000 in cash or equity. You have $300,000 available in equity in your existing property so, in this example, you have enough to cover the 20% deposit to meet the requirements of the bridging loan.
In the meantime though, you’ll need to apply for a deposit bond to secure the purchase of the new property.
Once your bridging loan is advanced, you’re able to move into the new home and advertise for short-term tenants to live in your old property until you sell it. After, 5 months you’re able to sell your existing home for $500,000.
The sales proceeds are subtracted from the peak debt plus capitalised repayments accrued over the 5 months it took to sell your home. This reduces the new mortgage to $435,000 plus capitalised repayments.
From there, you simply continue to make normal home loan repayments under the new mortgage.
Do you need a bridging loan?
Bridging loans are a great option if you need to move quickly to buy a property. Like any other home loan though, it’s not a debt to be taken on lightly and it pays to speak to a professional mortgage broker so they can provide the right recommendations to you.
Please call us on 1300 889 743 or fill in our free assessment form today to find out if you qualify for a bridging loan.