What is a bridging loan?

• A bridging loan is a short-term loan that helps you buy a new property before selling your current one. It provides a financial bridge, so you don’t have to wait for the sale of your existing home to secure your new one. Typically, you’ll have up to 12 months to sell your old property, during which you can make interest-only repayments, keeping things manageable while you’re in transition.
• Ideally, the bridging term should be no more than 6 months for buying an existing property and no more than 12 months for buying a new property. Extensions are available on a case-by-case basis.
• Verify with the selected lender whether interest-only repayments on peak debt are required during the bridging period, or if they will be capitalised and paid only at the conclusion of the bridging period.

How does a bridging loan work?

• Example: Jack and Jill have an apartment in the city which they intend to sell. They have an existing mortgage balance of $300,000 on the apartment. Before they’re able to sell the apartment, they see a house come on the market in an ideal location that they don’t want to miss out on. They apply for a bridging loan and get approved, during which the couple’s existing $300,000 loan becomes the bridging loan with a maximum loan term of 12 months.
• For the new house, the couple gets approved for a $600,000 home loan. That means the couple now have a $900,000 combined debt ($300,000 existing debt plus $600,000 new home loan as peak debt).

What happens if the apartment is sold during the bridging period?

• The couple decides to make interest-only repayment. The couple sells their apartment six months down the line for $400,000. Of this, $300,000 is used to clear their initial mortgage balance on the property, which was sold. This leaves them with remaining proceeds of $100,000. If the couple decides to put this $100,000 towards clearing their home loan too, then their home loan is reduced to $500,000. Now that the property is sold, the home loan switches from interest-only to principal and interest repayment. Their repayment goes towards paying off both the principal loan amount as well as the interest.
• Quick snapshot:
  • $900,000 peak debt
  • less $300,000 mortgage on the property sold
  • less $100,000 net proceeds from sale
  • equals $500,000 end debt

What happens if the apartment is not sold during the bridging period?

• Twelve months later, the apartment remains unsold because the couple is not happy with the value of offers received. The bank steps in to assist with the sale of the couple’s property for the best offer of $270,000. The proceeds from the sale are not enough to pay off the couple’s apartment home loan. So, the shortfall of $30,000 is added to the new home loan, subject to approval. This increases the home loan balance to $630,000. The couple makes principal and interest repayments on the $630,000 home loan now that his bridging period is over.
• Quick snapshot:
  • $900,000 peak debt
  • less $270,000 net proceeds from the sale
  • equals $630,000 end debt

How do I qualify for a bridging loan?

• You need the equity: There is no hard and fast rule but it’s recommended you have more than 50% in equity to make the bridging loan worthwhile.
• You have to meet standard serviceability requirements: This includes providing evidence of your current income, employment status, expenses and other supporting documents as if you were applying for a standard refinance.
• Property Listing: Some lenders may demand that you’ve already exchanged unconditional sale contracts on your existing property. We work with lenders who are happy to accept an exclusive agency agreement from a licensed agent who has listed your existing property for sale on the market.

How much can I borrow, and do I need to put down a deposit?

• Borrow up to 80% of the peak debt: Peak debt is the purchase price of the new property plus your current mortgage.
• Borrow up to 90% of the peak debt: Most lenders who offer bridging finance will go up to 90% of the property value; however, they’re harder to qualify for, and LMI (Lenders Mortgage Insurance) will be payable.
• Interest payment and fire sale buffer may be added: Lenders will normally add a 6 month interest rate buffer when assessing your ability to pay off the bridging loan. They’ll also discount the projected sale price of your existing property by around 15%, otherwise known as a “fire sale’ buffer. This can have an impact on your borrowing power.
• Bridging finance isn’t covered by Lenders Mortgage Insurance (LMI), a one off premium charged when borrowing more than 80% of the value of a property. That means you need around at least 20% of the peak debt as a deposit in order to buy the new property. Because you haven’t sold your existing property yet, you’ll need to have this amount as savings that you’ve accumulated over 3 months, which can be quite difficult to do when you’re currently making mortgage repayments.
• One alternative is to apply for a deposit bond, a guarantee from an insurance company to the vendor that you will complete the purchase. You can apply for one as soon as you get formal approval from the lender. A deposit bond costs you around 1.2% of the amount of the deposit as a once off fee. A bond for a 20% deposit on a $600,000 property, for example, will typically cost around $1,440.

How much does it cost?

• Capitalised interest: The cost of a bridging loan goes up significantly, the longer it takes for you to sell your property as the interest is calculated daily and capitalised monthly.
• Property valuations: You pay for two property valuation ,i.e. one for the existing property and one for the new property you’re buying. Each property valuation can cost you up to $600.
• Purchasing costs: As a rule of thumb, you can use 5% of the property value as purchasing costs.
• Selling costs: As a rule of thumb for the estimated agent fees, marketing costs, and sundry costs, you can use 3% of the estimated selling price.
• Loan application fees: Bridging loan application fees can go up to $1,000. Some lenders can consider waiving this application fees.
• Please note that for bridging loans with a peak debt between 80%-90% of the property value, LMI fees will apply.

What are the pros and cons of a bridging loan?

• Pros:
  • You can buy your new property right away: You don’t have to wait to get a loan.
  • It gives you time to get a better price on your property: You can avoid the stress of having to sell your property quickly. By taking the time, you may be able to get a better price for your property.
  • Interest-only repayments which are capitalised on your peak debt: Your bridging loan repayments are usually ‘frozen’ during the bridging term until you sell your existing home. You’ll only have to keep paying your current mortgage and not have to worry about managing two home loans.
  • The same fees and charges as a standard home loan: Application fees (usually around $600) are the same and you don’t have to worry about break costs or discharge fees for paying the loan off quickly. Keep in mind that most lenders won’t generally approve a bridging loan if you’re likely to sell the property in less than 3 months.
• Cons:
  • Interest is compounded monthly: Although the interest is capitalised on top of the peak debt, the longer it takes to sell your property, the more your loan will accrue interest. Interest is compounded on a monthly basis.
  • You need to pay for two valuations: This will be a valuation of both your existing property and the new purchase and cost between $200-$220.
  • Higher interest rate if you don’t sell the property in time: If you don’t sell your existing home within the bridging period, a lot of lenders will charge a higher interest rate. Many will also require you to start making principal and interest repayments on the peak debt in order to service both loans. This can cause financial stress.
  • No redraw facility: 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.
  • Normal early termination fees will apply if switching lenders: If your current lender doesn’t offer a bridging loan product, you’ll have to go with another lender that will likely insist on taking on the entire debt (your existing mortgage plus the bridging loan). Because you’re switching lenders, you may be liable for early termination fees and break costs particularly if you’re switching during a fixed interest period.

What is the difference between closed and open bridging loans?

• Closed bridging loan: This is where you agree on a date that the sale of your existing property will be settled and you can pay out the principle of the bridging loan. This type of bridging loan is only available to homebuyers who have already exchanged on the sale of their existing property. Sales rarely fall through after the exchange so lenders tend to see them as less risky.
• Open bridging loan: This is for people who have found their perfect property but don’t have an exact date to exit the bridging finance because they haven’t put their existing home on the market yet. Lenders tend not to like these types of arrangements. In cases like these, lenders are likely to ask a lot more questions and will want to see the details of the new property and proof that your current home is being actively marketed. You’ll need a significant amount of equity in your current property and an exit strategy in case the sale falls through.

Can I get a bridging loan for construction?

• Most lenders won’t approve a bridging loan to cover the costs of building a property.
• Some lenders 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.
• This brings the total bridging term for construction to a maximum of 12 months.
• Repayments are required for both your current mortgage and the new loan but you have 12 months, instead of 6, to sell the property.

What are some tips for managing a bridging loan?

• Get a proper valuation of your existing property and be realistic about how much you can sell it for.
• It’s recommended that you have at least 50% in equity in your existing property to avoid having to pay a large interest bill.
• Be realistic in how long it will take you to sell your property. What is the market like where you live? Also, take into account the time it takes to reach settlement (6-8 weeks in some states).
• It’s recommended that you make some repayments during the bridging period in order to minimise the interest and overall peak debt.
• Can you temporarily move back home or stay at a friend’s house, rent-free? You should consider placing short-term tenants in your existing property to help keep your interest costs covered while you’re trying to sell.
• You should compare your financial position very carefully, consider the costs, and decide if you’ll be better off using a bridging loan. For example, if your peak debt is greater than 80% LVR then it may be too high so you should consider selling first then buying afterwards instead of a bridging loan.

Property purchasing costs

• Minimum of 5% deposit
• Stamp duty
• Property title transfer fee
• Registration fees
• Conveyancing fees
• Inspections including building/strata and pest
• Home loan set up fees
• Lenders Mortgage Insurance (LMI)

Property selling costs

• Agent Fees
• Marketing Costs
• Conveyancing Fees
• Capital Gains Tax (CGT)
• Presale Repairs and Renovations
• Styling/ Home Staging
• Auctioneer’s Fees
• Lender Fees
• Moving Costs