Bridging Loans: Everything You Need to Know
When you’re in the middle of purchasing a new property while waiting to sell your existing one, a bridging loan can be the solution you need to fill the financial gap. In Australia, bridging loans offer homeowners the flexibility to secure a new home before finalizing the sale of their current property. Here, we’ll explore what bridging loans are, who they’re suited for, and the policy details that potential borrowers should be aware of.
What is a Bridging Loan?
A bridging loan is a short-term loan designed to provide funds for purchasing a new property while waiting to sell an existing one. This type of loan acts as a financial bridge, covering the cost of the new property until the old one is sold. Bridging loans are particularly popular in fast-moving property markets where buyers need to act quickly to secure a new home.
How Does a Bridging Loan Work?
Bridging loans operate under two main structures: closed and open bridging loans.
Closed Bridging Loan: This is ideal for borrowers who already have a buyer for their existing property and a set settlement date. Lenders generally prefer this type, as it poses less risk, and the loan term is typically shorter and more defined.
Open Bridging Loan: If you haven’t found a buyer for your current home, an open bridging loan may be the option. These loans are riskier, and lenders often require a viable sale plan. They may come with higher interest rates and stricter conditions. An open bridging loan typically lasts for up to 12 months but may extend up to 18 months, depending on the lender.
Bridging Loan Policies in Australia
Each lender’s policies may vary, but here are some of the common policy details regarding bridging loans in Australia:
Loan Amounts and Borrowing Limits
Lenders generally allow borrowers to take out a bridging loan amount that covers both the value of the new property and the "peak debt," which includes the outstanding balance of the current mortgage. The total bridging loan amount is determined based on the value of both properties (the one you’re buying and the one you’re selling).
Most lenders will cap the loan amount at around 80% of the combined value of the two properties.
For high-net-worth individuals or those with strong credit histories, some lenders may extend this cap.
Loan Terms and Repayment Conditions
The typical loan term for a bridging loan ranges from 6 to 12 months, but some lenders offer terms of up to 18 months. During the bridging period, borrowers can usually choose to make interest-only payments, easing the financial strain of holding two properties.
When the old property is sold, the borrower is expected to repay the entire bridging loan, including any interest accrued. Once this loan is settled, the borrower often converts any remaining balance into a standard home loan.
Interest Rates
Bridging loan interest rates can vary significantly across lenders, often being higher than standard mortgage rates due to the increased risk and short-term nature of the loan. Rates can range from 5% to over 7%, depending on the lender and market conditions. However, borrowers may qualify for a lower interest rate if they have substantial equity or strong financial credentials.
Eligibility Criteria
To be eligible for a bridging loan, most lenders in Australia require borrowers to:
Have a substantial deposit, often at least 20% of the new property’s value.
Provide evidence of a stable income to demonstrate that they can manage the payments.
Meet standard lending criteria, including good credit history and income requirements.
In some cases, lenders may also request proof of marketing the current property or a timeline for sale.
Exit Strategy
Most lenders require a clear and viable exit strategy, which includes a plan to sell the existing property and repay the bridging loan. The exit strategy is essential for reducing the lender’s risk and is usually required when applying for an open bridging loan.
Pros and Cons of Bridging Loans
Pros:
Flexibility: Bridging loans enable you to purchase a new property without waiting for your existing property to sell.
Quick Access to Funds: Bridging loans are typically approved faster than standard loans, helping you secure your dream property before it’s off the market.
Interest-Only Repayments: Most lenders allow interest-only payments during the loan term, easing the monthly financial burden.
Cons:
Higher Interest Rates: Bridging loans often come with higher interest rates compared to standard mortgages, making them more expensive.
Short Loan Term: With most bridging loans having terms under 18 months, there’s a time pressure to sell the existing property.
Lender Restrictions: Lenders may impose a strict loan-to-value ratio (LVR) cap, requiring a substantial deposit or equity in the existing property.
Is a Bridging Loan Right for You?
Bridging loans are suited for borrowers who are confident in selling their existing property within a short timeframe. However, this type of loan is typically best for:
Homeowners Upgrading to a New Property: If you’re looking to upgrade to a larger or more valuable property, a bridging loan can provide the financial flexibility to move ahead.
High Net-Worth Individuals and Investors: Individuals with substantial assets and strong financial profiles may find bridging loans to be an efficient way to manage cash flow between property transactions.
Tips for Getting Approved for a Bridging Loan
Prepare a Solid Exit Strategy: A clear plan for selling your existing property is essential for approval, particularly if applying for an open bridging loan.
Demonstrate Financial Stability: Proof of a stable income and good credit history will help you meet lender requirements.
Assess Your Budget: Consider how you’ll manage both interest-only payments and any potential repayment obligations.
Conclusion
A bridging loan can be a powerful tool for Australians navigating a competitive property market. By understanding the policies and requirements of bridging loans, you can determine whether this type of loan aligns with your financial goals. Remember to compare lender offerings, review interest rates, and ensure a solid exit strategy for a seamless transition to your new property.
At Rosh Partners, we specialize in guiding homeowners through complex financial situations, including bridging loans, to help make your property goals a reality. For more personalised advice, reach out to us for expert mortgage broking solutions tailored to your needs.
