What is a bridging home loan?

A bridging home loan is a short-term financing solution designed to help you purchase your next property before you sell your current one. Many homeowners rely on the equity from their existing property to fund their next purchase. However, aligning the sale of your current home with the purchase of a new one can be challenging. This is where bridging finance comes into play.

How does a Bridging Home Loan work?

A bridging home loan provides a temporary line of credit, allowing you to proceed with your new property purchase while your existing home is still on the market. Once your current property is sold, the proceeds are used to repay the bridging loan, leaving you with a single mortgage on your new property. This type of loan is also useful if you’re living in your current home while building a new one.

Example: How Bridging Finance Can Work

Let’s consider an example with Paul and Lara. They own an apartment with a $400,000 mortgage and have $200,000 in equity. They’ve found a new family home priced at $900,000 and plan to use their $200,000 equity as part of the deposit. However, they haven’t sold their apartment yet, and the auction for the new home is imminent.

Paul and Lara opt for bridging finance. With this product, they’ll have:

- A $400,000 mortgage on their current apartment,

- A $200,000 bridging loan to cover part of the new home’s purchase price,

- A $700,000 mortgage on their new home.

This brings their total debt to $1,300,000 temporarily. Once their apartment is sold, the $400,000 mortgage and the $200,000 bridging loan are fully repaid, leaving them with a single $700,000 mortgage on their new home.

Potential Challenges with Bridging Home Loans

While bridging finance can be incredibly useful, there are some challenges to consider. One of the main barriers is the buffer that lenders apply. Banks often devalue your current home by around 15% before calculating whether you have sufficient equity for a bridging loan. This buffer accounts for potential price drops, capitalised interest, purchasing costs, and sale expenses.

In Paul and Lara’s scenario, their apartment would need to be valued at approximately $800,000 for them to secure a $200,000 bridging loan. If the valuation falls short, the bridging loan may not be viable.

When Is a Bridging Loan a Good Idea?

Bridging finance can be an excellent tool if you’ve found your dream home but can’t immediately access the equity in your current property. However, it’s important to have a deposit ready—this could be from savings or a home loan redraw facility.

Typically, you’ll have up to 12 months to repay the bridging loan once your property is sold.

When Might a Bridging Loan Be Unsuitable?

Bridging loans aren’t suitable for everyone. The interest rates on these loans are usually higher than those on standard home loans, making them more expensive. Additionally, you’ll be responsible for managing two mortgages simultaneously: one on your current home and one on the new property. The bridging loan doesn’t cover the cost of these mortgages, so the financial burden can be significant.

Moreover, taking out a bridging loan puts pressure on you to sell your current property quickly, as you generally have 12 months to repay the loan. If your property sells for less than anticipated, you might need to cover the shortfall from other funds, which can be stressful.

Need Guidance on Bridging Finance?

Bridging loans can be complex, and deciding whether they’re right for you requires careful consideration of your financial situation. If you’re unsure whether a bridging home loan is the best option, reach out to your trusted Mortgage Broker at My Finance Consultants. We can help you explore your options and find the most suitable home loan solution for your needs.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.