What is Bridging Finance?
Bridging finance is a short-term loan designed to help you purchase a new property before selling your existing one. It can be a helpful option when you’re not ready to list your current home or want to avoid the stress of buying and selling at the same time.
Typically, bridging finance has a term of 6 to 12 months, during which time you must sell your existing property and repay the loan in full.
Benefits of Bridging Finance
- Flexibility and Time:Allows additional time to sell your current home without the pressure of having to sell before buying.
- No Full Financial Assessment (in some cases):Where you are downsizing and not expecting to have ongoing debt, it can allow you to finance the purchase of a new property without having to go through a full financial assessment (as the bank considers the imminent sale of your existing home to clear the loan in full)
- Capitalised Interest:Depending on the lender, interest may be capitalised (added to the loan), meaning you won’t have to make repayments until the property is sold.
Potential Downsides
- Higher Costs:Bridging finance often comes with higher fees and interest rates compared to standard home loans.
- Cash Flow Impact:If the lender doesn’t capitalise interest, you’ll need to make repayments on the full loan amount during the bridging period, which can impact your cash flow. Lenders may require you to demonstrate that you have sufficient savings to cover this.
- Lender options limited: There are a limited number of lenders that offer bridging finance as a solution, and so you may need to refinance your existing mortgage in order to apply for bridging (which can increase costs)
How Does Bridging Finance Work?
There are two main types of bridging finance:
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Bridging with No End Debt
This occurs when the sale proceeds from your current property are enough to fully repay both your existing and bridging loans.
Example:
Mr and Mrs Jones have a current home worth $900,000 with a small loan of $100,000. They are looking to downsize to a smaller property and are wanting to purchase at a $650,000. They don’t have any cash savings available to go towards the purchase and would like to borrow enough funds to cover their new purchase including costs.
- Current home value:$900,000
- Existing loan:$100,000
- New purchase price:$650,000
- Funds required for purchase (incl. estimated costs):$675,000
- Estimated sale proceeds (before loan repayment):$870,000
- Total to repay at settlement (existing + bridging):$775,000
Mr and Mrs Jones will need a bridging loan of $675,000 to complete their new purchase. When they sell their current home, they will need to pay both the bridging loan and the existing loan that they have against the property.
They will have sufficient funds from the sale of their existing home to repay these loans in full, there will be no ongoing debt.
Where there will be no ongoing debt, the Lender won’t typically need to complete a full financial assessment on your application.
-
Bridging with End Debt
This applies when the sale of your current home does not cover the entire funds required to repay your bridging and existing loan, resulting in ongoing debt after the sale. In this case, you’ll have two loans:
- Loan 1:Bridging loan (paid out when the property sells)
- Loan 2:Ongoing loan (assessed under the lender’s standard lending criteria)
Example:
Helen has an existing property worth $550,000 with a current loan of $200,000.
She is looking to upgrade and purchase a new home for $700,000. She has $80,000 in her savings that she would like to contribute towards the purchase.
- Existing property value:$550,000
- Current loan:$200,000
- New home price:$700,000
- Available savings (deposit):$80,000
- Funds required to complete purchase:$740,000 (includes estimated purchasing cost) minus $80,000 = $660,000
- Estimated sale proceeds (before repayment of existing loan):$475,000
Loan Breakdown:
- Loan 1 – Bridging Loan:Capped at 85% of the existing home’s value = $467,500 (including the existing loan of $200,000).
o Amount available for new purchase: $267,500
- Loan 2 – Ongoing Loan:$392,500
Helen will need to demonstrate to the Lender that she has the capacity to repay the ongoing loan of $392,500 with a full financial assessment required.
If you’re currently exploring options to buy your next property before selling your current home and think bridging could be a good option for you, reach out to your broker for a chat.