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What is a bridging loan?
A bridging loan (also known as bridging finance) is a short-term home loan that can help you finance the purchase of a new property while you sell your current home. It removes the inconvenience and cost of renting a property in the interim.
You can also use a bridging loan to finance a new construction while you continue to live in your existing property.
Bridging loans generally have higher interest rates than a standard mortgage, and strict eligibility requirements apply. Not everyone qualifies for a bridging loan, so speaking to your mortgage broker about your options is best.
How does a bridging loan work?
A bridging loan combines your current home loan with the loan you need to buy your new property. This means you’ll need to manage two repayments during the bridging period. Your application will be evaluated based on your ‘peak debt,’ which is the combined total of your old loan and your bridging loan, minus any deposit you can contribute.
The maximum amount you can borrow for a bridging loan will depend on the price of your new property and the equity available in your current property (the one you’re selling). Repayments on bridging loans can be principal and interest (P&I) or interest-only.
Bridging loan example
Suppose your home is valued at $600,000, and you have an outstanding loan amount of $300,000. This means you have $300,000 in usable equity.
You want to buy a property valued at $700,000, but you need some time to get your ducks in a row and prepare your existing home for sale. Plus, you don’t want to miss out on the property if other buyers make an offer. In this case, you have $300,000 in equity to deposit towards your new loan.
Who’s eligible for a bridging loan?
Here are the minimum requirements lenders consider when assessing eligibility for bridging finance:
- Australian citizenship or permanent residency
- You must be over 18 years of age
- To qualify for a bridging loan, you must demonstrate your ability to make interest-only repayments on both your existing mortgage and the bridging loan
- Some lenders may also require you to have savings to cover all repayments during the bridging period
- Bridging loans generally have a maximum loan term of 12 months, so you should be confident you can sell and settle your current property within this timeframe
- You’ll typically need a maximum loan-to-value ratio (LVR) of 80% to qualify for a bridging loan
Bridging loans pros & cons
- You can buy your next home without having to sell your existing property first.
- Flexible repayment options (e.g. interest-only repayments) to manage ‘peak debt’.
- Purchase costs like stamp duty and legal fees can added to the loan.
- You can pay off your bridging loan early, usually without penalty.
- Interest on a bridging loan is calculated daily and charged monthly. This means the longer you take to sell your current home, the more interest you’ll pay.
- Bridging loans don’t have a redraw facility, so you won’t be able to access extra repayments during the bridging period.
- Lenders may order a valuation for both properties, meaning additional costs for you.
- If you sell your current property for less than anticipated and the proceeds don't cover the bridging loan amount (including interest), you might end up with higher ongoing debt than you had planned.
How to apply for a bridging loan
1. Work with a bridging loan broker
They will be able to tell you whether a bridging loan is right for you in the first place. Your broker will also be able to conduct thorough research on your current local area, the type of property you’re buying and selling, and current market conditions to gauge how long it might take to sell your property.
2. Submit a loan application (through your broker)
Your broker will manage the entire application process from start to finish. They will request your supporting documents directly from you, review them, and then submit them to the lender as part of the loan application.
The documentation required for your bridging loan application will vary depending on the lender, but will typically include:
- Two latest payslips
- Bank statements showing savings equivalent to your interest-only repayments
- Recent tax returns or notice of assessment from the ATO
- Proof of your assets (e.g. savings, shares) and liabilities (e.g. other loans)
- 100 points of ID (e.g. driver’s licence, passport)
- A copy of your deed/property title
3. Get pre-approved for a bridging loan
Once the lender has conducted all due diligence, you may be granted pre-approval. This will give you a clear idea of how much you can borrow and you’ll be able to shop with a set budget in mind. Having pre-approval also signals to real estate agents that you are a serious buyer.
Can a bridging loan be extended?
A bridging loan term is generally fixed for a maximum of 12 months, but there are some lenders like RAMS that may offer an extension on your bridging finance, subject to normal lending criteria.
What are some alternatives to a bridging loan?
Some alternatives are available if you don’t qualify for bridging finance or your broker doesn’t recommend this type of finance for your circumstances.
1
Add a ‘subject to sale’ clause on the contract of your new home
This makes the transaction contingent on you selling your current property.
2
Negotiate a longer settlement period on your new home
You can ask the seller of your new home to agree to a longer settlement period (e.g. 60 days instead of the typical 30 days) to give you more time to sell your current property.
3
Wait until you sell your current home
You could always wait to sell your current property before applying for a new home loan. The downside is that you might need to rent (or stay with family or friends) for a period after selling your old home and before finding a new one.