How home bridging loans work

By   |   Verified by Yvonne Taylor   |   Updated 8th August 2022

  • What a bridging loan is.
  • How a bridging loan works.
  • Pros and cons of bridging loans.

If you’re looking for a way to finance the purchase of a new home before you’ve completed the sale of your old one, you may have heard of bridging loans. You might also be wondering how they work and whether they are the right option for you.

This article will tell you everything you need to know about bridging loans and how to apply for one.

What is a bridging loan?

If you would like to buy a new house, but your current house hasn’t yet been sold, you probably need funds while you wait for the sale to complete.

A bridging loan is a short-term loan that allows you to bridge this gap in finances.

How does a bridging loan work?

A bridging loan typically consists of two portions of repayment called the peak debt and the end debt.

When you take out a bridging loan, the lender will typically take over the mortgage on your existing home as well as the new loan for the property you want to purchase.

The remaining balance on your mortgage, the new loan, and any additional purchase costs make up the peak debt.

Under normal circumstances, you will only need to repay the interest component of the bridging loan, leaving the principal to be repaid once the sale of your current property goes through. The sale proceeds will go towards decreasing the peak debt. The remaining debt is called the end debt. The end debt is then paid off as a normal mortgage until the loan is repaid.

Closed bridge vs Open bridge

Generally speaking, there are two types of bridging loan: closed bridge loans and open bridge loans.

Open bridge loans

An open bridge loan is more flexible, allowing you to choose how much you pay off and when. Thus there is no set repayment period. There is no set date by which it needs to be paid.

This type of loan is used when your home doesn’t yet have a buyer and can be in place for up to 12 months.

Closed bridge loans

A closed bridge loan has a set date to pay off the loan. These loans are used when you already have a contract of sale and you know when you will receive payment for your house.

Bridging loan eligibility criteria

To be eligible for a bridging loan, there are a few criteria you need to meet.

  • Deposit. You need to provide a deposit of at least 20% of the peak debt amount in either cash or equity.
  • Serviceability requirements. You must show that you will be able to pay off the loan. This means supplying documentation such as proof of your current income, employment status, and regular expenses.
  • Bridging loan terms. Typically, bridge terms are no more than six months for existing properties and no more than 12 months when purchasing a new home.
  • Sale contract for the existing property. Some lenders may require that you provide evidence of sale, such as a copy of the sale contract, as a prerequisite to the loan.

Which lenders offer bridging loans?

When looking for financing options, you might wonder where to enquire about taking out a loan. Due to the increasing popularity of bridging loans, there are several options.

Banks

Most banks offer bridging loans. However, this option may only be available to existing customers. Private lenders and fintechs are an option. Credit unions also offer bridging loans to their members.

Non-bank lenders

Other non-bank lenders can also offer bridging loans, often including attractive deals like giving the first few months interest-free. But take note that these lenders may also have higher application fees and interest rates.

Deciding which bridging loan offer is best for you while trying to navigate the purchase and sale of a property can be quite stressful.

To simplify this process, consider using a mortgage broker to help you find the perfect bridging loan for your unique situation.

How to apply for bridging finance

To apply for bridging finance in Australia, you must be at least 18 years old, be an Australian citizen or permanent resident, and you must earn a primary salary in Australian dollars.

You will also need to provide the lender with personal details about yourself, and relevant financial information such as:

  • your salary and other income;
  • a full breakdown of your living expenses;
  • a breakdown of any other loans, debt, or credit cards you currently have;
  • your driver’s licence information, if applicable;
  • a customer reference number or account number if you are an existing client of the lender.

Pros and cons

Pros

  • You don’t have to wait for your home to be sold before you can buy your new place.
  • No need to find other accommodation while you wait for your home to be sold, which may be a cheaper alternative to renting somewhere to live.
  • While you wait for your house to be sold, you may be allowed to repay only the interest component of your bridging loan. In some circumstances, you may even be able to have these interest payments capitalised and added to your loan amount.

Cons

  • Bridging loan application fees can be expensive (upwards of $1,000 in some cases).
  • You may need to get two property valuations, one for your current house and one for the house you intend to buy, meaning two sets of valuation fees.
  • Since most interest is accumulated on a monthly basis, the longer it takes to sell your house, the more interest you will end up paying.
  • If your current lender doesn’t offer bridging loans, you may have to terminate your current loan. This may mean paying early exit fees.
  • Interest on bridging loans is often higher than on regular term loans.
  • You may be forced to sell your property at a lower price to make a sale before the loan term is up.
  • You need to know how much your old home will sell for in order to avoid losing money on the loan.

Additional risks of a bridging loan

Aside from the cons of taking out a bridging loan, it’s important to be aware of additional risks.

For example, if your home isn’t sold in the required time, you may have a large interest bill, or the bank may even take over the sale of the house. So, you could lose your home and still owe your lender money.

Additionally, if your house is not sold for a high enough price, you may have a larger end debt than you budgeted for, which can quickly lead to financial trouble.

Bridging loan alternatives

There are alternative ways to finance the purchase of your new home before selling your current home.

  • Alter the sale contract of the home you would like to buy by including a ‘subject to sale’ clause. This means that if your current home is not sold, the sale of the new house will lapse without needing to be cancelled.
  • Try to negotiate a longer settlement period on the purchase of the new house. This gives you more time to sell your current home and pay for your new home.
  • Rent the property from the new owners if you’ve sold your current home but haven’t yet been able to buy a new place. Of course, this will only work if the new owner is amenable to the idea.

Case study

Will and Sarah own a home that they want to sell in order to purchase a new home for $600,000. Their remaining mortgage balance on their existing home is $100,000.

They take out a bridging loan to cover the purchase of their new house. There is an extra $32,000 to pay for stamp duty, loan application fees and legal costs.

They need a bridging loan for $732,000 ($100,000 + $600,000 + $32,000). This amount becomes their peak debt.

To qualify for the loan, they need to have 20% of the loan – $146,400 – in equity. Since their current home is valued at $450,000 and they have equity of $350,000, this will easily cover the 20% deposit to qualify for the loan.

While waiting for the sale of their house to go through, they are allowed to make only interest repayments on the bridging loan, rather than having to repay a portion of the principal as well. So their peak debt remains at $732,000.

The net amount of the sale of Will and Sarah’s current house, after several months, is $465,000. This is used to reduce their peak debt, resulting in an end debt of $267,000.

Their end debt will now be treated as a regular mortgage until fully repaid.

FAQs

Is a deposit required for a bridging loan?

To apply for a loan, you typically need to provide a deposit of 20% of the loan amount. Sometimes lenders will require 25%.

What costs are involved with a bridging loan?

Aside from the amount borrowed, other costs involved include loan application fees, stamp duty, legal fees, and other possible fees that may apply to your situation.

Can I get bridging finance to build a house?

Most lenders won’t finance a building project with a bridging loan. In the few cases where lenders do, the maximum bridging term is usually 12 months. You will need to ask your particular lender whether they finance building projects.

How long does it take for a bridging loan to be approved?

Typically, approval takes 7-14 days, but depending on the lender you are dealing with, this can vary between 5-21 days.

How long does a bridging loan last?

The maximum loan period for a bridging loan is 12 months. If you believe you may not be able to sell your house within 12 months, it’s a good idea to wait until your house is sold before making a new purchase.

Can I get a bridging loan with bad credit?

Getting a bridging loan is not usually possible if you have bad credit. However, these loans are considered on a case-by-case basis if you have only a minor default (under $500).

Bottom line

Bridging loans can help you purchase a new home even before you’ve sold your current one. They can offer a convenient and simple solution to moving house, but like all loans, they come with some downsides.

You should carefully consider the pros and cons of a bridging loan before making a final decision. Talk to a financial advisor if you are unsure or want more information.