A bridging loan is a temporary loan for 6 – 12 months that allows you to settle on the purchase of your new home while you wait for your old home to sell.
The amount of the bridging loan is usually
The bridging loan is then closed from the proceeds of sale from your current home, leaving you with a residual loan or “end debt” which you then repay.
A bridging loan is typically used where:
A bridging loan is a service provided by the bank, and as such incurs interest. This interest is paid for in one of two ways:
Capitalised interest is where the bank adds their interest to the bridging loan, at the end of the bridging period, just before the loan is paid out.
This usually has the convenience of not having to maintain monthly payments on the bridging loan, and therefore preserves your savings as usually most spare money has been contributed towards the deposit on your new property.
However, it is usually more expensive as a higher rate is charged.
The main alternative to a bridging loan is to sell and settle on your current home prior to or simultaneously with the settlement of your new home.
Banks view this approach as less risky. It is also less costly as you avoid bridging loan interest.
However, it is not always viable where you find a property you like quickly and have not listed your current property for sale.
For a bridging loan to work you will need to demonstrate:
Please note when calculating if there is sufficient equity the bank will also discount the value of your property slightly to account for any real estate agent selling fees and also to protect the bank in case the property is sold for lower than expected.
The peak debt refers to all the debt you will take on during the bridging period. It is typically quite high and consists of the bridging loan required PLUS the end debt remaining. During the bridging period interest must be maintained on both the bridging loan and the end debt.
The end debt, or the “residual debt”, is the loan remaining after the bridging loan has been closed. You must be able to demonstrate that you can service the end debt for the bank to approve a bridging loan.
The bank will order an official valuation report on your current home to make sure it has sufficient equity to pay out the bridging loan upon sale.
Again, despite this valuation report the bank will still discount the value of your property slightly when calculating your bridging loan to account for any real estate agent fees and to protect the bank in case the property is sold for lower than expected.
Not all banks offer bridging loans. Which bank we recommend depends on who your home is mortgaged to now, the value of your current home, and your current cash position, amongst other factors.
If you are considering a bridging loan, please contact us so we can provide you with a tailored assessment and recommendation.
A bridging loan usually lasts for a 6 to 12 month period. You may elect the term when making your application, and 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 interest costs to you.