Your search is at an end; you’ve found the perfect home and you’re already planning the kitchen renovations in your head. So it’s crucial to you that you buy the house as soon as possible, as you don’t want to risk someone else getting their hands on it!
There’s just one problem: You haven’t sold your current home yet or paid off the home loan attached to it, which will probably make it tricky to get approval for a new home loan.
In this case, you may be able to utilise a type of home loan known as a bridging loan (sometimes also known as bridging finance).
A bridging loan is a short-term home loan designed to help homeowners bridge the gap between buying their next home and selling their current property.
It involves a lender taking on your existing mortgage as well as providing you with a new short-term loan (the bridging loan) that covers the new property’s purchase price.
The total amount of debt taken on by the lender (between your existing mortgage and the new loan’s total amount) is referred to as your ‘peak debt’ and includes any costs of purchasing the new home, such as stamp duty and any legal or lenders’ fees.
Once your current property is sold, the proceeds (after fees) will be used to pay down the peak debt, and the remaining amount will then typically be converted to a standard home loan product.
The new component of a bridging loan will usually only require interest-only repayments, meaning you won’t be required to pay down the new principal (the amount you borrowed) while it’s still at the bridging stage. Additionally, you can also opt to capitalise your interest costs into the loan, meaning they’re added to the total loan amount rather than charged as regular repayments.
However, keep in mind that you’ll be required to continue making your regular home loan repayments towards your existing home loan principal, the ‘old’ component of your bridging loan.
You’ll generally have a choice of two different types of bridging loan, and your choice will typically be determined by how much progress you’ve made in buying your new home. Let’s go over how the two types of bridging loan work and explore what kinds of borrowers and financial situations they might be suitable for.
Open bridging loans are designed for prospective homebuyers who are still just that – prospective. An open bridging loan will probably be the right choice for you if you don’t have an agreed settlement date for your existing property just yet, as their longer life (usually up to 12 months) makes them suitable for those who are still looking around.
While this open-ended flexibility can be invaluable in helping you navigate both the buying and selling processes with minimal hassle, keep in mind you’ll be accruing interest charges for however long it takes you to sell your current home. If it takes you the full 12 months to sell your home, you may find yourself saddled with significant interest charges as a result.
If you’ve got a contract of sale in place and know when settlement date will be, you could opt for a closed bridging loan. This type of bridging loan is for those working within a specified timeframe, who know exactly when their existing home is going to be sold.
At the end of the loan’s timeframe (usually settlement day), you’ll pay down your peak debt as well as any interest and fees accrued during the bridging loan term.
To qualify for a bridging loan, you’ll typically want to have satisfied the following requirements:
Please keep in mind that your lender may have additional eligibility requirements for bridging loan applicants; you may want to speak with your lender before submitting a formal application.
As you can see, bridging loans come with a very specific set of upsides and downsides. Let’s put the main points side by side to see how they stack up.
| Pros | Cons |
| Offers you the flexibility of buying a new home before you’ve sold your old one. | Taking on such a large amount of debt could be stressful, particularly if you’ve opted for an open bridging loan. This can also hold true for closed bridging loans, especially if there’s a lengthy settlement period involved. |
| The ‘new’ component will typically be interest-only, and you can usually opt to have that interest capitalised into the loan to reduce your immediate costs. | Opting to capitalise the interest into your loan can leave you with a much bigger home loan balance than you were bargaining on. |
| Can help you avoid renting and storage costs. | Your home may sell for less than you want due to the property’s value declining, or it may not sell at all – in this case, you’d most likely find yourself under severe financial stress. |
If you’re unable to sell your existing property within your bridging home loan term, your lender may:
You may want to enquire with your lender regarding this potentiality and how they’d handle it before applying for a bridging loan with them.
Lenders in Australia will typically charge higher interest rates for bridging loans than what you’d see on standard home loans. These higher rates can be chalked up to the loan’s relatively short-term basis and the fact that they pose more risk to the lender than a standard home loan would. Most bridging loans will be variable rate; however, you may be able to find a fixed rate bridging loan that suits your needs and priorities.
And at the end of the day, you can still compare different bridging loans based in part on their respective comparison rates to help figure out which ones might offer better value, just like regular home loans!
If the idea of a bridging loan doesn’t appeal to you, you could alternatively choose to:
Depending on your lender, you might be able to take out a bridging loan to facilitate the construction of your new home. However, you may need to satisfy extra lending criteria or face additional hurdles if you’re looking to build, such as a shorter loan term or a higher interest rate.
If you can’t sell your existing property for the amount you expected, you’ll still need to pay your outstanding bridging loan amount. In a scenario like this, you would want to thoroughly consult with your to establish your range of options and potential plans of action.
Depending on your lender, you may be able to make extra repayments towards your bridging loan to help you pay it down earlier and reduce the amount of interest you’ll need to pay all up.
Whether you’ve decided to take out a bridging loan or stick with a standard home loan, you can compare a wide range of different home loan options using our home loan comparison service! It’s completely free and easy to use, and will help you narrow down your options while you hunt for the right home loan to buy your dream home with. Simples!
