You’ve found your dream home and…it's at the right price!!! But what if your current home, complete with its own mortgage, hasn't sold yet? A bridging loan might be the solution.
What is a Bridging Loan?
A bridging loan is a short-term financing option that will help cover the cost of your new home while you’re in the process of selling your current one. This type of loan acts as a financial “bridge” from one property to the next, offering a buffer to sell your existing home even if it still has a mortgage. Sounds great right? Well, it very well could but there are some key things you need to know.
This financial solution essentially provides the means to cover the interim period, ensuring a smooth transition between properties.
What is involved with a Bridging Loan?
Bridging loans are additional loans taken on top of your current home loan, offering a line of credit to fill the period from the moment you buy your new home to when you receive funds from selling your old one. This financial solution essentially provides the means to cover the interim period, ensuring a smooth transition between properties.
However, it’s crucial to understand that during this bridging period, you’re responsible for managing payments on both your existing home loan and the bridging loan. You must demonstrate your ability to cover the interest costs associated with the bridging finance while you’re in the process of selling your existing home.
Following the sale of your property, the bridging loan terms typically allow up to 12 months to repay the funds used to ‘bridge’ the gap, facilitating your move without the immediate pressure to sell your previous home under unfavourable conditions.
What is involved with a Bridging Loan?
Bridging loans are additional loans taken on top of your current home loan, offering a line of credit to fill the period from the moment you buy your new home to when you receive funds from selling your old one. This financial solution essentially provides the means to cover the interim period, ensuring a smooth transition between properties.
However, it’s crucial to understand that during this bridging period, you’re responsible for managing payments on both your existing home loan and the bridging loan. You must demonstrate your ability to cover the interest costs associated with the bridging finance while you’re in the process of selling your existing home.
Following the sale of your property, the bridging loan terms typically allow up to 12 months to repay the funds used to ‘bridge’ the gap, facilitating your move without the immediate pressure to sell your previous home under unfavourable conditions.
How are Bridging Loans Structured?
Bridging loans are typically structured as interest-only loans, with their value based on the equity of your existing property and a defined loan term. They include specific conditions, for example, lenders may apply a higher interest rate if the property linked to the loan isn’t sold within a set period. The specific arrangement of a bridging loan can vary significantly between different lenders. In some cases, the loan allows borrowers to continue making repayments solely on their original mortgage up until the settlement of their new property. During the bridging period, the interest incurred on the bridging loan is compounded to the loan’s balance.
Once the sale of the original property is finalised, and the first mortgage is settled, repayments then shift towards reducing the principal amount of the bridging loan, including any accumulated interest.
Alternatively, certain loan agreements may stipulate that borrowers begin making payments on both the original and the bridging loan immediately upon initiating the new loan. This dual-repayment structure continues until the sale of the first property is complete, at which point the bridging loan may be settled or transformed into a standard home loan for the new property.
There is also an option for those who are downsizing to structure the bridging loan, so they do not have any end debt at the end of the period.
Pros and Cons of Bridging Loans
Like any financial product, bridging loans have their advantages and disadvantages. On the plus side, they can provide the convenience of purchasing your new home immediately without waiting for your current one to sell. Depending on the loan structure, you might only need to continue making payments on your existing mortgage during the bridging period, potentially avoiding the need to rent temporarily.
However, there are risks involved, particularly if your home doesn’t sell within the required timeframe, leading to significant interest costs or even the bank intervening to sell your property. Additional costs for bridging finance can include multiple property valuations, loan fees, and possibly higher interest rates if the property isn’t sold in time. Switching lenders for a bridging loan could also incur termination fees from your current loan, especially during a fixed rate period.
Other options
Before jumping into a bridging loan, consider other options like negotiating a “subject to sale” clause in your new home’s purchase contract or extending the settlement period to allow more time to sell your current property. Seeking advice from a financial professional can also provide tailored guidance for your situation.
Bridging loans can offer a strategic solution for navigating the timing challenges between buying a new home and selling your current one. However, thorough research, understanding the terms and conditions, and considering your financial stability and market conditions are essential before making this commitment.
If you’d like more information on bridging loans and how they might be able to help you, please book a meeting with our mortgage and lending team.
