Understanding Bridging Finance: A Comprehensive Guide

Buying a new home while waiting to sell your existing property can be a challenging process. Bridging finance offers a temporary solution, allowing you to secure your new property without having to wait for the sale of your current one. In this article, we’ll explain how bridging loans work, their benefits and costs, and what to consider before applying.

Bridging finance helps homeowners transition smoothly from selling one property to buying another.

What Is Bridging Finance?

Bridging finance is a short-term loan that helps homeowners purchase a new property while waiting for the sale proceeds of their existing home. This type of home loan covers the financial gap, allowing buyers to proceed without delays.

How Does a Bridging Loan Work?

A bridging loan typically involves two key stages:

1. Bridging Period: During this time, the loan amount includes the outstanding balance on your current property and the purchase price of the new property. Interest may be capitalized, meaning repayments are deferred until the loan term ends.

2. End Loan Stage: Once the existing property is sold, the sale proceeds are used to pay down the bridging loan, leaving the remaining amount as a standard home loan secured against the new property.

Types of Bridging Loans

1. Closed Bridging Loan: Suitable if you have a confirmed sale date for your current property. Lenders offer this option with a fixed term.

2. Open Bridging Loan: Ideal when your current property hasn’t been sold yet. It provides flexibility but comes with higher risks and stricter eligibility criteria.

Example of Bridging Finance in Action

• New Property Value: $700,000

• Outstanding Mortgage on Existing Property: $200,000

• Sale Price of Existing Property: $500,000

During the bridging loan period, the total loan required is $900,000 ($700,000 for the new property + $200,000 for the existing mortgage). After selling the current property, $500,000 goes toward the loan, reducing it to $400,000, which becomes the standard home loan amount.

Benefits of Bridging Loans

• Property Purchase Flexibility: Buy a new property before selling the old one.

• Reduced Financial Stress: Avoid interim accommodation and moving costs.

• Competitive Market Advantage: Act quickly when purchasing in a hot market.

Costs and Considerations

1. Short-Term Solution: Bridging loans are temporary, with a repayment period usually within 6 to 12 months.

2. Higher Interest Rates: Bridging loans often have higher rates than standard home loans.

3. Fees: Consider establishment, valuation, and legal fees.

4. Loan-to-Value Ratio (LVR): Most lenders allow up to 80% LVR.

5. Repayment Conditions: Understand repayment schedules and interest capitalization options.

Eligibility Criteria

Lenders assess applicants based on the following:

• Income and credit history

• Equity in the existing property

• Sale timelines and property market conditions

Is Bridging Finance Right for You?

Bridging finance can be a powerful tool if you need to buy before selling. However, it’s essential to:

• Have a clear sale plan for your current property.

• Budget for interest and fees.

• Consider alternatives such as home loan portability or negotiating extended settlement terms.

Bridging finance simplifies the home-buying process by bridging the gap between property transactions. If you’re considering this option, consult with a mortgage broker to explore tailored solutions based on your financial circumstances and property goals.

Disclaimer:

The information provided on this website is for general information and educational purposes only. It does not take into account your personal objectives, financial situation, or needs, and should not be relied upon as financial, legal, or tax advice. While we strive to ensure the content is accurate and up to date, we make no guarantees of its completeness, reliability, or suitability. Any reliance you place on the information is strictly at your own risk. We recommend that you seek independent professional advice before making any financial decisions, including from a licensed mortgage broker, financial adviser, or tax professional. References to government schemes, grants, or lender products are subject to change and eligibility criteria. Please confirm details with the relevant authority or provider. We are not responsible for any loss, liability, or damage incurred as a result of the use of this website or its content.