Want to buy a new home but haven’t yet sold your old one? A bridging loan may be the answer.
18 March 2022|6 minute read
Finding a new home can be a very exciting and nerve-racking experience. If it’s your second property, you’ll probably be quite familiar with the homebuying process.
What happens to your existing home loan if you’ve found a new home but haven’t yet sold your old one? Or if you’d like to hold off on selling your existing home until you’ve found a new one to move into?
The process can be a little tricky, but there are several ways it can be done.
A bridging loan is one option that appeals to many homebuyers who want to purchase a property before selling their existing one.
Here we’ll go through what a bridging loan is, how it works, the benefits and downsides and a few alternative options that might also be worth looking into.
A bridging loan (also known as bridging finance) is a short-term, interest-only home loan.
It acts like a bridge to help you finance the gap between buying a new property and selling an existing one.
It can also come in handy if you want to finance a build for your new home while you continue to live in your existing property.
Bridging loans usually have a fixed term of 6-12 months and close once your existing property is sold.
The size of the loan is often calculated using the equity you have available in your current property.
It also may carry special conditions – such as increased interest rates – if your existing property is not sold in the specified time frame.
If you’re thinking about applying for a bridging loan, reach out to an Aussie Broker to talk about your options.
Let’s say your house is valued at $500,000. You have an outstanding amount of $300,000 left on your current home loan and $200,000 in equity.
You’ve found a new home that’s going to cost you $800,000 but you don’t want to rush the selling process for your existing home.
You also don’t want to risk the new property being taken by someone else while you try to sell your existing home.
You can take out a bridging loan to remedy this problem.
During the bridging period, your current $300,000 home loan becomes your bridging loan for a fixed 12 month period.
You are also approved for a $600,000 variable rate home loan for the new property.
This makes your combined home loan balance $900,000. This is also known as the peak amount.
Bridging loans allow you to access equity as security for the deposit towards the new property.
In this case, you have $200,000 in equity, which you use to make up the deposit towards your new loan.
During the bridging period, you’re able to make principal and interest or interest only repayments.
You choose to pay both home loans using interest only payments during your bridging period to avoid increasing your loan amount.
Six months later, you’ve sold your existing home and received a net amount of $500,000.
You take $300,000 to pay off your bridging (original) home loan and contribute the remaining $200,000 towards your new home loan.
Your new loan now has an outstanding balance of $600,000. You switch your repayment type from interest only to principal and interest and start paying off the loan on your new home.
Lenders in Australia generally offer two types of bridging loans:
A closed bridging loan is based on an agreed time frame with the lender.
It is available to borrowers who already have a contract of sale for their existing property and know what date this contract will settle.
At the end of the specified timeframe, you’ll have to pay out the remaining principal of the loan plus any accrued interest and fees.
An open bridging loan is available to borrowers who have not yet sold their existing home and don’t have an agreed settlement date.
This type of bridging loan can generally be arranged for up to 12 months.
Bridging loans may not be suitable for all borrowers and not everyone will qualify. This will depend on the bridging loan terms of the borrower as well as your current financial situation.
Lenders will often ask if you have a certain amount of equity in your existing home loan, or additional savings, that can serve as a deposit on your new home loan.
You will typically need a maximum Loan to Value Ratio (LVR) of 80% to be eligible for a bridging loan.
A bridging loan can typically take 5-10 days to be approved by the lender.
In more complex scenarios, approval can typically take up to 21 days depending on the lender.
A bridging loan may be worth it if you have an existing home loan and want to purchase a new home before you sell your existing property. Some of the benefits include:
When you’re looking into whether a bridging loan is the right choice for you, it’s important to also consider the potential drawbacks. These might include:
If you’d like to buy a new property before selling your existing one, it’s important to weigh all your options so you can choose one that works best for your situation and needs.
A bridging loan is not the only option out there. You might also consider:
It’s important to be aware of both the pros and cons of a bridging loan and understand how it may affect your situation.
Getting a valuation of your existing property so you know how much you’ll be able to sell it for can help you make an informed decision.
Do your research on the area in which your property is located, the type of property you’re trying to sell and current market conditions. This will also give you a better idea of how long it may take to sell your property.
Also take the settlement period (which typically lasts 6-8 weeks) into account. Remember, most bridging loans are short-term and only last 6-12 months.
Some lenders may recommend you have at least 50% equity in your existing home before you consider a bridging loan to avoid having to pay a large amount of monthly interest.
If your financial situation allows it, try to make payments throughout the bridging period to prevent interest from stacking up and to minimise your debt overall.
Finally, as with all big financial decisions, it’s a great idea to consider all potential outcomes and have a backup plan ready.
Chat to an Aussie Broker about all your options and whether a bridging loan may be right for you.
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