Time to read : 4 Minutes
If you’ve ever tried to juggle buying and selling a home at the same time, you’ll know it’s like trying to change outfits mid-marathon – tricky, stressful, and you run a risk of ending up in your underwear on the front lawn.
That’s where bridging loans come in: the short-term finance solution designed to help you buy your next place before selling your current one. As an ex-mortgage broker I’ll explain how a bridging loan could help you go the distance… and when it could lead you off-course.
How do bridging loans work?
In simple terms, your lender takes over your existing mortgage and finances the purchase of your new property at the same time. The total you owe at this stage is your Peak Debt which is basically, your old loan + your new loan + costs like stamp duty and legal fees.
For up to 12 months, you can usually pay interest only – and in some cases, you don’t even need to make monthly repayments because the interest can be ‘capitalised’, that’s just a fancy way to say added to your Peak Debt.
When you sell your old place, the sale proceeds go towards your Peak Debt, leaving you with an End Debt. That’s just a regular home loan from then on.
Priya’s story: how a bridging loan helped her
For several years, Priya lived in her high-rise Melbourne apartment. Her goal was to buy a house and relocate to Sydney. By luck, she found her dream home in Sydney's west and bought it for $1.5 million. She then put her Melbourne apartment on the market.
The balance from her original loan was $200,000. That meant her Peak Debt was $1.7 million.
By ‘capitalising’ her interest, Priya didn’t have to find the cash for two sets of mortgage repayments each month while waiting for her Melbourne place to sell.
Three months later, she sold it for $1.2 million. Allowing for closing costs for both her sale and her new home purchase, she was able to cut her Peak Debt down to an End Debt of $500,000. So, she’s been making repayments on that amount– while enjoying her new life in Sydney.
For Priya, a bridging loan was a good solution for her situation. Let’s look at some positives… and negatives of bridging loans.
What are the pros of bridging loans?
Flexibility – you have up to 12 months to sell your old property.
Breathing room – you can avoid moving twice or paying for temporary accommodation.
Interest-only repayments (and sometimes no repayments) during the bridging period.
You may be able to get 100% finance for your new property plus costs (subject to eligibility).
What about the cons of bridging loans?
Interest is calculated on your Peak Debt – which can be large and grow if capitalised.
Interest rates on bridging loans are typically higher than for a standard home loan.
You need to have enough equity in your current home to qualify for a bridging loan.
If your old property takes too long to sell, you could run out of time and find yourself paying two mortgages.
Note: with a bridging loan your End Debt can’t be over 80% of your new property’s value.
When might you consider getting a bridging loan?
When you’ve found your dream home but risk missing out on buying it while you wait for your old home to sell.
If you need some time to renovate or stage your current home for a better sale price.
When you’ve built good equity in your old home and have a realistic plan for selling it within 6-12 months.
Your new home purchase settlement period is significantly sooner than your old home sale.
Note: both buyers and sellers of properties can request longer or shorter settlement periods while negotiating the sale contract.
When a bridging loan might not be your best option:
If you’re already stretched with your current mortgage repayments.
If your property could take a long time to sell. There can be various reasons for this such as:
if the home is located in a niche or remote area
major repairs like a roof replacement is needed
your home has unusual design elements that could limit its market appeal
similar homes in your area have not sold, or taken a long time to sell.
You have little equity and would be borrowing close to 100% of your new home price without a clear repayment strategy.
Bottom line
In the property buying race, a bridging loan can help you reach the finish line – if you use it wisely. But it’s not a free pass to buy two houses and figure it out later.
It works best if you have plenty of equity, a solid plan, and the help of a good mortgage broker who can find you competitive rates and terms for both your loans – the short term bridging one, and your final home loan.
Go deeper:
What happens if interest rates change when you're refinancing?
Why are home buyers choosing to borrow from non-bank lenders?
Financial disclaimer
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
