Selling your existing home and buying a new home simultaneously can be a little difficult in that the sale of your property, and finding a new property, rarely occur simultaneously. 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. This type of finance is also known as a ‘Relocation Loan’.
The primary 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 existing property, even if you already have a mortgage. It essentially creates a financial “bridge”, allowing homeowners to traverse the gap between buying and selling. The bridge normally lasts between six and twelve months, with higher rates charged if the property is not sold in the agreed time-frame. There are cases where a bank will get involved in the sale of your former property (not ideal).
The bridging loan is one that is taken in addition to your primary loan, meaning that you will be servicing your old property in addition to the new property, with the older property normally financed with a type of ‘Interest Only‘ loan.
You will often be exposed to the term ‘Peak Debt’. Peak debt is used to describe the total funds borrowed from a lender for the short duration of the bridging loan. Peak Debt is generally calculated by adding what you need to borrow to buy your new home to the outstanding mortgage on your existing home.
Qualifying for a Bridging Loan
The conditions of bridging loans varies from one bank to another, so it’s always best to have a quick discussion to see what kind of product might best fit your circumstances. Generally speaking the following criteria needs to be met (although it varies):
- Equity. You should have equity in your existing property – ideally more than 50%.
- Serviceability. You should demonstrate your ability to service your new home and the bridging loan.
- Unconditional Sale. Contract should be exchanged on the sale of your existing property.
How a Bridging Loan Works
The following elements of a bridging loan are generally shared between lenders.
- Fees and Charges. When you take out a bridging loan, the lender will usually provide finance for the purchase of the new property, as well as taking over the mortgage on your existing property. There will be costs involved in setting up the borrowing structure, and the rate and term may also be adjusted to fit your circumstances.
- Peak Debt. For the duration of the bridging loan your monthly mortgage commitments will be higher based on the aggregated ‘Peak Debt’ (the total owed on both properties).
- Ongoing Balance, or End Debt. The balance remaining after the sale of your property becomes known as an ‘Ongoing Balance’. This new balance may be transferred to another product by the banks (and may attract better conditions and a lower rate). Your payments will be lower, although it’s always worth paying more (since you have demonstrated your ability to do so).
Type of Bridging Loans
The two primary types of bridging loans are Closed Bridging Loans and Open Bridging Loans. The former category applies to those that have a sale date agreed, upon which the bridging loan is paid out in full. The closed bridging loan (not accepted by all lenders) applies when an exact sale date of your existing property is not yet known (they’re identified as higher risk).
The Advantages and Disadvantages
As with all bank products it’s important to assess the pros and cons, and have us investigate the most suitable and cost-effective solution.
- Convenience. Bridging loans could help ensure you can buy your property now without having to wait for your current home to sell.
- Repayments. Depending upon the type of product selected, you may only be required to pay out the balance on your existing property, and if repayments are applied to the Peak amount, you may be able to pay interest only.
- Avoid Renting. Knowing that you won’t have to rent for a period, or you won’t have to burden family with accommodation, offers peace of mind.
- Better Property Price. You won’t be forced into selling your property for less than its value, and you may see a price increase during the bridging term.
- Better Rates. Many lenders charge higher rates for bridging loans, but others will charge a reasonable market value.
- Pressure on Selling. Having time to sell your home is also a disadvantage because you’re still locked into a defined time period to sell your property. At the end of the agreed period you may find yourself accepting lower offers.
- Loan Costs and Fees. You may incur two property valuations, with fees assigned to both products (since the bridging product itself is two products).
- High Interest Costs. The longer it takes to sell your property, the more interest your new loan will tend to accrue. If you don’t sell your existing home within the bridging period, you will typically be charged a higher interest rate.
- No Redraw. 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.
- Early Termination. If your existing lender does not offer a bridging loan, or will not provide you with one of their products, you will likely inherit an early termination fee when existing your product.
Construction Bridging Loans
Many lenders are now providing bridging loans on the basis of building a new home, rather than purchasing an existing property, and this wasn’t always the case with the higher risk of construction, and the way the construction loan is managed.
We have lenders on our panel that 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.
Alternative to Bridging Loans
Bridging loans are not your only option. Since the cost can be quite high, and the product does place pressure on the sale of your existing property, you may want to consider the following:
- Altering the purchase contract. It may be possible to add a “subject to sale” clause on the contract for your new home. Your sale contract wouldn’t then be unconditional until you sold your existing home.
- Negotiating a longer settlement period on your new home. Negotiating a longer settlement will mean that you will have additional time to find a new home and move out.
Costs of a Bridging Loan
The costs involved in a bridging loan can be high because of the two properties involved, and you should also expect to incur costs associated with the sale of your existing home.
- Capitalised Interest. Interest is calculated daily and capitalised monthly. Bridging loans become more costly the longer you keep them in place.
- Property Valuations. As mentioned, you’re financing two properties so you should expect to pay fees associated with both (this won’t always apply, particularly if the bridging loan is taken out with your existing lender). A valuation will normally cost between $400 and $600 (some banks will waive this fee).
- Loan Application Fees. Bridging fees can often attract a fee between $700 and $1200, although many banks will waive this fee.
- Selling Costs. Selling your existing home costs money. You should expect to pay between 1% and %3 of your property value for marketing and other associated costs.
The conditions of bridging loans vary from lender to lender, but the following additional considerations may apply.
- Bad Credit. Bridging loans are not normally provided to those with bad credit, although minor defaults or balances are usually acceptable.
- Early Repayments. Paying off a bridging loan early will reduce your outstanding home loan balance, which in turn will reduce the monthly interest charges.
- Short Term Bridging. You may apply for a bridging loan for a short period of time, from a few days to a few weeks. Keep in mind that costs will usually still be applied despite the shorter term.
- Realistic Sale Price. Get a proper valuation of your existing property and be realistic about how much you can sell it for.
- Equity. Is is recommended you have at least 50% equity in your current property.
- Extra Repayments. It’s recommended that you make some repayments during the bridging period in order to minimise the interest and overall peak debt.
- The Exit Strategy. What is your fallback position, if your home doesn’t sell as quickly as expected? Could you consider placing short-term tenants in your existing property to help keep your interest costs covered while you’re trying to sell?