Bridging loans explained
Found your new home but haven’t sold your old one yet? You could consider a bridging loan. This is a short term loan (usually up to 12 months) that is closed when your existing property is sold. The size of the bridging loan is calculated on the available equity in your current home.
There are two types of bridging loans:
- Closed bridging loans – used if you already have a Contract of Sale on your current property and know the date when your home will be sold and the funds received. You’ll pay down the loan plus any accrued interest and fees on this date.
- Open bridging loans –this is used if your current home hasn’t been sold yet. An open bridging loan can be arranged for up to 12 months.
What are some of the benefits of a bridging loan?
Whether you’re upgrading or downsizing, a bridging loan can provide a solution that allows you to avoid the stress of having to sell your home first and find temporary accommodation while you search for your next home.
The benefits of a bridging loan include:
- Being able to proceed with confidence when you’ve found a new home but haven’t started the process of getting your current home ready for sale
- Avoiding the hassle of having to rent, so you can skip the stress of having to sell your current home, move into a rental property and then move again once you’ve found a new home
- Having the option of making payments only on your current loan (you’ll need to pay interest on your bridging loan when you sell your existing home and the bridging loan is closed)
- Having the option of reducing your interest costs by making payments on the bridging loan during the bridging period.
- Adding upfront costs such as stamp duty and legal fees to your bridging loan if the property value and equity is sufficient.
What about downsides and other things to consider?
It’s important to weigh up any potential downsides or other points to consider with taking out a bridging loan as well. These could include:
- Paying interest on interest - If you don’t make any payments on the bridging loan the interest is added to the balance, so you’ll end up paying interest on this interest.
- No access to a redraw facility - if you choose to make payments during the bridging term, you won’t be able to access those funds later.
- The length of time it could take to sell your current home - a bridging loan is a short term loan and there are penalties for going over the 12 month period, so you’ll need to make sure you understand your market and how long your style of property will take to sell. It’s also important to keep in mind the longer it takes to sell your property, the more interest you’ll have to pay on your loan.
- The value of your current home - you’ll need to have a good idea of what your current home will sell for so you can budget properly for the new loan payments.
Building with a Bridging Loan
Apart from buying an existing property, bridging loans are also an option if you want to stay in your current property while you build a new property. It saves you the hassle of selling your property and renting somewhere short-term, not to mention having to pay for the costs of moving twice.
Do you need a deposit for a bridging loan?
No, however, if you don’t have a cash deposit you will need at least 20% of the peak debt as available equity (peak debt is the purchase price of the new property plus your current home loan).
If you need to borrow above 80% of the total security value, Lenders Mortgage Insurance (LMI) will be applicable and the one off premium is charged on the full amount required. Your lender can help you calculate this.
You’ll also need to find the 5-10% deposit for your new property purchase. Since you haven’t sold your existing property yet, you’ll need to have this amount as savings.
If you’re in this situation, one alternative is to apply for a deposit bond. This is a guarantee from an insurance company to the vendor that you will complete the purchase. You can apply for a Deposit Bond once you have your loan approved.
Tips to help you choose if a bridging loan is right for you
- 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.
- 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.
- What is your fallback position, if your home doesn’t sell as quickly as expected? Can you temporarily move back home or stay at a friend’s house, rent-free? Or could you consider placing short-term tenants in your existing property to help keep your interest costs covered while you’re trying to sell.
Things you should know
Credit criteria, fees and charges apply. Terms and conditions available on request.
This information in general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information and, if necessary, seek appropriate professional advice.