What is a Bridging Loan?
A Bridging loan is a loan facility that “bridges” the gap in funds that are created when the settlement of a property being purchased is going to take place before the settlement of a property you are looking to sell. Essentially it is a short-term loan with capitalised interest repayments that are paid out from the future sale proceeds.
The final structure of most bridging loans is two separate loan facilities, the first of which is called the End Debt loan and the second is the bridging facility. The End Debt loan is the loan that would have existed even if you had sold your property prior to buying the new one. The End debt loan is treated as a standard loan and is not subject to the same restrictions as the bridging facility.
Do all lenders offer Bridging Loans?
No, not all lenders offer Bridging Loans and some major banks only offer Bridging loans to existing mortgage customers. To see if your current lender offers Bridging loans you should speak to your lender or broker.
Am I eligible for a Bridging Loan?
Eligibility criteria does vary from lender to lender but as a general rule you should have at least 50% equity in your current home OR have additional cash funds to contribute to the purchase.
The maximum total loan that would be considered is going to equal 80% of the value of both the property being purchased and the property being sold. If that amount, plus cash on hand is not sufficient to cover the purchase, plus costs and any current and related home loan balance then a Bridging loan is unlikely to be approved.
NOTE: Some lenders will discount the value of the property being sold by up to 15% in calculating the maximum loan amount. This is because they assume you may have to take a lower offer if your property does not sell within the desired time frame.
What if I will be mortgage free after the sale of my property?
If you currently do not have a mortgage or are downsizing and the sale of your current home would leave you debt-free, unfortunately, most lenders will not give you a bridging loan, as they don’t see it as financially viable.
The one exception to this is St George Bank, who has a product called a Relocation Loan with No End Debt.
How much do Bridging loans costs?
Some lenders provide Bridging loans at the exact same cost as any standard home loan; however, many others have a higher interest rate on the bridging loan portion. A valuation fee of between $300-$700 is also likely, as most lenders offer one free valuation and a bridging loan generally requires two valuations. Some lenders will also charge an application fee for the bridging loan, this would typically be between $600 - $1,200.
The main cost is the interest accruing on the bridging loan, which is calculated daily and capitalised onto the bridging loan monthly. The true cost of a bridging loan is then ultimately determined by both the size of the bridging loan and the length of time the bridging loan is required.
What are the benefits of a Bridging loan?
The two main benefits of a bridging loan are that it enables some people to buy now and sell later and that repayments on the bridging loan are capitalised each month. This means the cost of the bridging loan is solely paid for out of the proceeds of the sale and regular repayments are not required. You will still make the repayments on the End Debt loan, just like any other home loan.
What are the downsides of a Bridging loan?
The biggest downside to a bridging loan, aside from the cost, is the fact that you are required to sell your property within a year. This could lead to having to take a lower offer than desired and the end result would be a larger End Debt loan that you will have to repay like any normal loan.
Whahat are some alternatives to a Bridging loan?
The main alternative to taking out a bridging loan is to have the sale of your property settle before, or in some cases on the same day as your purchase. Settling the sale and purchase on the same day does take some negotiating and careful planning on both sides but isn’t all that uncommon.
Another option available to people with strong borrowing power is to finance the purchase with a standard home loan and own both properties. This is often achieved by the lender accepting rental income on one of the two properties. The benefit of this structure is you are not forced to sell any of the properties within any set time frame. The downside is that repayments cannot be capitalised and can create a larger monthly expense than desired.