A bridging loan is a short-term loan designed to bridge the financial gap between the purchase of a new property and the sale of an existing one. These loans are particularly useful for homeowners who need to buy a new home before their current property is sold. Bridging loans provide the necessary funds to complete the purchase, ensuring that you don’t miss out on an opportunity due to timing issues.

How does a bridging loan work?

When you apply for a bridging loan, the lender will assess the value of your current property and the new property you intend to purchase. The loan amount is usually based on the equity in your existing home, which serves as collateral for the loan. Open bridging loans have no fixed repayment date, which is suitable for borrowers who have found a new property but have not yet sold their current home. Closed bridging loans, on the other hand, have a fixed repayment date and are typically used when a signed contract is already in place for the sale of the existing property.

Benefits of Bridging Loans

Bridging loans offer several advantages for homeowners and investors alike

They provide flexibility, allowing you to secure a new property without waiting for your current home to sell. This can be particularly beneficial in competitive real estate markets where timing is crucial.

Bridging loans can help you avoid the inconvenience and costs associated with temporary accommodation between selling and buying, as you can move directly into your new home.

They can be helpful if you want to renovate your current home before selling, as it allows you to move into the new home first, then renovate the existing property without having to live in it at the same time.

It is a common misconception that you need to make full repayments on two loans during a bridging period. Some lenders only require you to make repayments on the ‘end-debt’ ie. the loan that will be ongoing. Interest on the ‘peak-debt’ is then capitalised onto the loan and paid out when the existing property is sold. This reduces the household cashflow pressure during the bridging period.

Risks and Considerations

While bridging loans have their benefits, it’s important to consider the potential risks.

One of the main risks is the amount of interest that can accrue on two mortgages simultaneously if your existing property takes longer to sell than anticipated.

Additionally, bridging loans often come with higher interest rates compared to traditional home loans, reflecting the short-term nature and increased risk for lenders.

Bridging loans typically work best if there is a relatively low borrowing ratio on the existing property so may not be suitable/possible for those selling a property that is already at or around 80% LVR.

It’s crucial to have a clear repayment plan and to consult with a broker to ensure that a bridging loan is the right choice for your situation.

If you’re thinking of making a move I hope this information is valuable to you and I’d love to hear from you to discuss how I may assist with your real estate aspirations.