Bridging Home Loans
For most of us knowing when to upgrade the family home usually becomes pretty obvious. You might have a baby on the way, or simply run out of space to fit life into where you’re currently living. What happens next once you’ve made the decision to upgrade? Often the biggest question you will be facing is whether you should buy first and then sell or the other way around.
Buying and selling your home can be a complicated process. Lots of people sell their current home and use the equity to fund their next purchase, however sometimes it’s not possible to line up the sale dates. You might find your dream home before you’re ready to put your current home on the market. A bridging home loan could be the solution, it is a short-term loan which helps you to finance your next property purchase while you wait for your current property to sell.
If you would like to get a better idea of your borrowing power and what your likely repayments might be, try our Borrowing Power Calculator and Loan Repayment Calculator.
Advantages of using a bridging loan
A bridging home loan is designed to help borrowers who require finance to purchase their new home, before they have sold their existing property - it is a temporary facility for 6 to 12 months. When utilising a bridging loan facility, the lender extends a line of credit to you to cover your contribution to the next property.
The facility works by providing finance for both the existing property and the new home. It also allows you capitalise interest onto the bridging loan – allowing you to manage your cash flow during a short period of higher than normal debt. Once your existing property is sold, the original home loan is paid out and only any debt related to the new purchase remains.
If you don’t make any repayments during the bridging period, this will mean that the bridging loan amount will increase at a compounding rate - it’s best wherever possible to make as much of a repayment as possible during this time. People can also use bridging home loans if they are living in their current property whilst they are building their new home.
Disadvantages of using a bridging loan
A bridging home loan is not for everyone. The interest rate on a bridging loan is usually much higher than the interest rate on a standard home loan, so it’ll cost you more if you need this type of finance. When using this type of facility it is important to keep in mind that you will be paying two mortgages at once, the bridging facility doesn’t cover any of these costs. Therefore, not only do you have to pay a higher interest rate on the bridging finance, but you’re also up for the cost of two mortgage repayment amounts.
A bridging loan facility can put pressure on you to sell your current property. There is a maximum bridging period in which the original property must be sold, this is generally 6 to 12 months. The greatest risk is that your property will not sell within the bridging period, which may see an increase in the interest rate charged. If your current property sells for less than you thought, you may also find yourself in a position where you must pay back the bridging finance with funds other than the sale proceeds. This doesn’t happen often because lenders ensure you have a buffer in place.
The main barrier to utilising a bridging home loan is the fact that lenders put significant buffers in place, in case your current home sells for less than expected. Some lenders will do a valuation on the current home and take 15% off the value before working out if you have enough equity for a bridging home loan. Once the buffer is factored in, along with room for capitalised interest, purchasing costs and sale costs, it can be quite difficult to get a bridging home loan.
How much will it cost to upgrade your home?
One of the major factors in any decision you make to upgrade is going to be the associated costs. This includes the cost to sell the existing property, including marketing and real estate fees. You will need to consider all of the expenses that are attached to selling the existing property. Try our Property Selling Cost Calculator to estimate the associated selling costs.
The next expense to consider is going to be the costs associated with buying – can you afford to purchase where you want to? Try our Stamp Duty Calculator and Property Buying Cost Calculator to estimate the associated purchasing costs. Are you going to require another home loan and if so, how much can you afford to borrow? Try our Borrowing Power Calculator to get an indication of how much you can afford.
Over the years a lot of lenders have changed how they assess a borrowers income and expenses, meaning that what you can borrow now may be vastly different to when you first purchased your home. Before you dive in and start making offers or bidding at auctions, we strongly recommend speaking with your trusted Mortgage Broker. They will be able to conduct a thorough financial assessment and have a detailed discussion with you about your current lending situation.
Why choose My Finance Consultants?
We do all of the legwork
We compare hundreds of home loan options from a wide choice of lenders, including the big banks and specialist lenders. We handle every step, having a thorough process in place to qualify you with our lender panel to find the most suitable lending options for you. We organise all of the required paperwork, order lender valuations, liaise with your real estate agent and conveyancer for a smooth transition to settlement.
We provide a convenient service
Mortgage Brokers save you the time and hassle involved in applying for a home loan - from application through to settlement. We'll meet at a time and place that best suits you, to establish your needs and preferences. We then do all the research and running around to manage every step of the application process. This saves you shopping around - as we do it all on your behalf.
We provide professional advice
We are fully trained, and accredited with every lender we represent. We are full members of the Mortgage & Finance Association of Australia and we have many years of industry experience. We also have a number of consumer protection initiatives in place to protect you - our valued clients. As mortgage professionals, we seek to guide you through the lending process to help you make better financial decisions.
We help you select the right home loan
Our first priority is helping you select the home loan that’s right for you, now and into the future. Your Mortgage Broker will save you the time and hassle associated with shopping around for a home loan, they will also guide you through the home lending process to help you make better choices with your personal finances.
We will always try to save you money
We use comprehensive software which helps us pinpoint the most suitable and competitive home loan for you. Typically, our service can help cut the current interest rate you are paying as well as reduce your fees and monthly repayments. Using a Mortgage Broker is also a great way to figure out a strategy to maximise your borrowing power.
We don’t charge you a fee for our service
There is no charge to you for our services because the lender pays us a commission once your loan has settled. We do charge a commitment fee for home loan pre-approval applications, however we will refund this to you upon settlement of your home loan. We will always aim to provide a trusted, friendly and professional mortgage broking service.
Our clients have been saying some great things about us!
Whatever your goals, a competitive home loan will get you there faster!
Whether you're a first home buyer, upgrading to your next home, getting into property investment, or wanting to refinance and pay off your existing home loan sooner, we can help you make the right decisions and stay on top - whatever your home loan needs.
We'll compare more than 40 leading banks and lenders, as well as hundreds of home loan options to find one that's right for you. No matter what kind of mortgage you're interested in, you'll enjoy expert home buying and lending advice from a Mortgage Broker you can trust.
Our industry knowledge and sophisticated mortgage software allows us to assess and compare the hundreds of home loans that are available in the marketplace, we will calculate your borrowing capacity and identify which lenders you will qualify with.
If you're ready to start your home loan journey, give our friendly team a call on 1300 381 955 or visit the Book Appointment section on our website.
FAQs
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A bridging loan is typically used when you’re buying a more expensive property than your current home, this process is referred to as upsizing. A bridging loan will appeal to those who have significant equity in their current home. The facility is designed for those who are about to purchase a new home, but have not yet listed their existing home for sale. This may be due to timing or because renovations need to be completed prior to the sale.
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A bridging home loan is a service provided by the lender, and as such you will incur interest. This interest is paid for in one of two ways:
As an interest only expense paid monthly during the bridging period
As capitalised interest
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Capitalised interest is when a lender adds their interest charges to the balance of the bridging loan without receiving a repayment from the borrower. This means that you will be able to preserve your savings for more important things, like paying the deposit on your new property or managing your cashflow.
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The peak debt refers to all the debt you will be taking on during the bridging period, it is typically quite high. It consists of the bridging loan, the original home loan and the new home loan. During the bridging period, repayments must be maintained on both the original and new home loan.
The end debt is the loan remaining after the bridging loan and the original home loan have been closed. You must be able to demonstrate that you can service the end debt for the lender to approve your bridging loan.
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Yes. The main alternative to a bridging home loan is to sell and settle on your current home prior to or simultaneously with the settlement of your new home. Home loan lenders view this approach as being less risky. It is also less costly for the borrower because the interest payable on a bridging loan can be avoided.
If you’ve been fortunate enough to successfully make an offer on a new property and had a buyer sign a contract for your existing property within days of each other, then you are in a great position. Lots of people choose to time their settlement day so that the sale of the existing property coincides within days of the purchase of the new property.
If you’ve used the same conveyancer for your sale and purchase it should be fairly straightforward for them to negotiate and time these settlements to your advantage. This is the ideal scenario, as it allows you to settle both the sale and purchase of the new property on the same day - you don’t end up with an overlap requiring you to pay two mortgages at once.
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For a bridging home loan to be approved by a lender you will need to demonstrate that:
You have sufficient equity in your current property to close out the bridging loan and pay for any capitalised interest after the sale
You can afford the interest during the bridging period either from savings set aside or having enough equity buffer to pay for capitalised interest
You can afford the end debt that will remain once the bridging loan and the original home loan have been closed
You still have sufficient equity after discounting the value of your property, incase it is sold for a lower amount than expected
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Your home loan lender will order a valuation report on your current home. This report will determine if you have sufficient equity available to pay out the bridging home loan once your existing property has been sold.
Despite having access to a valuation report, lenders will still discount the value of your property when calculating your bridging home loan. This is to protect the lender in case the property is sold for a lower amount than expected.
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Not all home loan lenders offer bridging loans. The lender that we recommend will depend on who your home is currently mortgaged with, the value of your current home and your current cash position.
There are lenders who can provide a superior level of service for those needing this type of finance. If you’re considering a bridging loan, contact us so that we can provide you with a recommendation.
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A bridging home loan usually lasts for a period between 6 to 12 months. You may elect the term when making your application, we typically recommend a longer term to give you enough time to sell your current home. It is in your best interest to close out a bridging loan as soon as possible to minimise the associated interest costs.
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Yes. Paul and Lara own an apartment with a mortgage of $400,000 and have $200,000 worth of equity. They find a new family home they want to buy for $900,000 and want to use their $200,000 worth of equity to put towards the purchase. Unfortunately, they haven’t yet sold their apartment and the auction for the new home is this weekend.
Paul and Lara decide to use bridging finance, by utilising this type of product they will have a loan of $400,000 on their apartment, a bridging loan of $200,000 and a loan of $700,000 on their new home bringing their total debt to $1,300,000.
Once their old property is sold, the $400,000 mortgage on the apartment and the $200,000 bridging loan will be repaid entirely, leaving them with a single loan of $700,000 against their new family home.
Some banks will do a valuation on the current home and take 15% off the value before working out if you have enough equity for a bridging home loan. In this scenario, it would mean that Paul and Lara’s existing property would need to be worth around $800,000 for a $200,000 bridging loan to work.
Once the buffer is factored in, along with room for capitalised interest, purchasing costs and sale costs, it can be quite difficult to get a bridging home loan.