Found the home of your dreams and want to know about bridging finance? Find out everything you need to know here
Introduction to Bridging Finance
We have many people contacting us every week wanting to know more about bridging finance, how it works and if it’s a good option for them.
There are a few things to be aware of that may catch out the unwary or inexperienced, but the good news is that the brokers we work with are experts when it comes to bridging finance and will be able to guide you and find the best deal for your circumstances.
We’ve put together this guide to answer as many questions as we can, but if you need more information contact us here.
In this article we’ll cover:
- What is bridging finance?
- How does a bridging loan work?
- What are the different types of bridging loans?
- What are the requirements for getting a bridging loan?
- What are the pros and cons of a bridging loan?
- What are the costs associated with a bridging loan?
- Is it just for short term loans?
- Are there any risks I should know about?
- What can I use bridging finance for?
- Do I need a deposit for a bridging loan?
- Are there any alternatives to a bridging loan?
- How quickly can I get a bridging loan?
- Can a bridging loan be used for commercial properties?
- Who are the best bridging loan lenders?
- Can I get a bridging loan with bad credit?
- Talk to a bridging loan expert
What is a bridging loan?
Also called ‘bridging finance’, this is a form of finance that is most often used in the Australian market by homeowners who need to finance the purchase of their next home, before they have had a chance to sell their existing property.
It’s essentially an interest only home loan, usually offered on a short term basis. Although all lenders are different, how much you can borrow with a bridging loan is usually calculated on the amount of equity you have in your existing home.
This is a loan on top of your current home loan, so during the bridging loan period, you’ll have to pay the interest on two loans.
Some lenders only require you to continue payments on your original home loan, the lender will then add the interest to the bridging loan, but you won’t have to make any repayments until your current property is sold.
Other lenders may require repayments on both loans from the time you take out the bridging finance.
When you finally sell your home, the bridging loan is converted into a standard home loan.
It’s important that you are aware of the bridging finance loan period, which is 6 months for an existing property and 12 months for a new property.
This is why you should get expert help from one of the brokers we work with who, having access to the whole of the home loans market, will be able to find the best deal for you.
How does a bridging loan work?
By taking out a bridging loan, the lender effectively finances the purchase of your new home, whilst taking over your existing mortgage.
The total amount you borrow is called the ‘peak debt’. This is worked out by adding the cost of your new home to the outstanding amount left on your current home.
By subtracting what you expect to get from the sale of your old home, you’ll find out how much the ‘ongoing balance’ is, and this will be the balance of the new loan.
During bridging finance period, you will pay interest compounded monthly on the ‘ongoing balance’, usually at the standard variable rate.
If your current mortgage is $200,000 and you want to buy a property worth $700,000.
Peak Debt = $200,000 (existing mortgage) + $700,000 (new house) = $900,000
Estimated sale of existing home $400,000
Ongoing Balance = $900,000 – $400,000 = $500,000
There are lenders who don’t charge higher interest rates on bridging loans than on any other home loan product, but it pays to have a whole-of-market broker compare the market for you to make sure you end up with the best deal.
Have a chat with one of the expert brokers we work with by making an enquiry here – we don’t charge a fee and there’s no obligation.
Are there different types of bridging loans?
Yes. You usually have a choice between a closed bridging loan and an open bridging loan.
Closed bridging loans
This is perfect for those who have already agreed on the sale terms of their property. These are seen by lenders to be less risky as the sale has already been locked in and you will be paying out the bridging loan on a set day.
Open bridging loans
You’d need to take out this sort of bridging loan if you haven’t finalised the sale of your home, or it’s not on the market yet. This is usually used by people who have seen their dream home and want to make an offer.
These loans are seen to pose a higher risk to lenders, so generally you will need a higher level of equity in your current home.
Also, having a back up plan in case the sale of your home doesn’t go through is a good idea.
What are the requirements for getting a bridging loan?
There are some criteria that are required for a bridging loan that would not usually apply other types of home loans.
- A maximum loan to value (LTV) can be required, which means you could be required to pay a higher deposit.
- You will need to abide by the maximum loan period of 6 to 12 months.
- Redraw facilities are usually not allowed to be used during bridging loan period.
- Bridging loans are not generally allowed for the construction of a house.
- They are not usually available for company purchases or strata title purchases.
What are the pros and cons of a bridging loan?
It is vitally important to know what the pros and cons of a bridging loan are. We recommend you talk to one of the expert, bridging finance brokers we work with about this – there’s no fee and we won’t leave a mark on your credit rating.
Pros of bridging loans
- A bridging loan allows you to buy your next home straight away, without waiting for your current property to sell.
- In most cases, you need only keep up payments on your current home loan.
- You don’t have the expense and hassle of renting a house between the time you sell your old house and the new home settles.
Cons of bridging loans
- Bridging finance may require two valuations, your old house and your new home, which means valuation costs for two properties.
- Interest is charged monthly, so the longer it takes to sell your old house, the more interest you will have to pay.
- If you don’t sell your home within the bridging loan period, then lenders can charge a higher interest rate.
- If you current lender doesn’t offer bridging finance, then you’ll need to change to another provider, which could mean paying early exit fees.
What are the costs involved with a bridging loan?
Interest on a bridging loan is compounded monthly, so the longer it takes to sell your current home, the more interest you’ll have to pay.
Also if you go over the loan time frame, lenders can charge a higher rate of interest.
There may also be fees on top of the interest you pay, so be sure to include these in your calculations.
Fees on a bridging loan may include some, or all of the ones listed below:
- Arrangement or facility fee. This is the cost of setting up bridging finance, typically you could pay between 1-2% of the value of the loan.
- Exit fees. If you pay back the loan early, you could be charged around 1%, although not all lenders charge this.
- Legal fees. Usually a set amount, this covers the lenders legal and solicitors fees.
- Valuation fees. You could have to pay for two valuations, your existing home and the one you want to buy.
Administration or repayment fees. This is to cover the cost of the paperwork at the end of the loan.
The above list is by no means comprehensive because all lenders are different, so you may be faced with other fees.
Recently, many lenders will allow you to make payments to offset the amount of interest you pay at the end of the loan.
Is it just for short term loans?
Yes. The loan terms for bridging finance are usually set to 6 months for an existing house and 12 months for one that is being built. If you go over those periods, then you face higher interest charges.
Are there any risks I should know about?
The most prominent risk is if you fail to sell your existing home within the bridging loan period (6-12 months).
You could also fail to make the projected sale price of your existing property and fall short of the amount you need to pay out the bridging finance.
If you go beyond the set time period, the majority of lenders will increase the interest rate and there are many who will require that you convert the loan to a standard interest and principal home loan, and you will then be stuck with servicing both loans.
What can I use bridging finance for?
In Australia, bridging loans have become an increasingly popular way for people to move from one home to another. In an ideal world, your old home would settle on the same day as your new one, sadly, this is rarely the case, so a bridging loan means you put in an offer on a new home, before you sell the old one.
You can use a bridging loan (dependant on all other loan criteria being met) for the following:
- Buying a property
- Property development
- Buy to let investment
- Business venture
- Paying a tax bill
- Divorce settlement
Most lenders will not approve bridging finance to cover the costs of building a new home.
But there are a few lenders, and the broker we work with know who they are, who will consider a bridging loan for construction as long as it is completed within 6 months
Do I need a deposit for a bridging loan?
Yes. Because bridging finance is not covered by lenders’ mortgage insurance (LMI), which you will need if borrowing more than 80% of the value of the home.
This means you’ll need to find at least 20% deposit in order to buy your new home. This will need to be in the form of regular savings over a least 3 months, which can be quite difficult for some people already paying an existing mortgage.
An alternative is to apply for a deposit bond, which is essentially a guarantee from an insurance company to the seller that you will complete the purchase.
Are there any alternatives to a bridging loan?
There are only choices open to you depending on your circumstances and how much you need to borrow. Be aware than taking out additional credit through other means can put you in a difficult financial situation.
Could you be better off selling your existing property first and moving into rental accommodation? This all depends on how much interest you would have paid as opposed to how much you would spend on rent.
Could a wealthy relative or business help out with a peer to peer bridging loan? These are not very common and you would need the right advice from an expert to make sure you are getting a favourable deal. You can make a no obligation enquiry here.
How quickly can I get a bridging loan?
Typically, a regulated bridging loan can take four to six weeks to arrange.
But if the property you want to buy is for investment purposes, then depending on your circumstances, it could be as little a 3-5 days.
Can a bridging loan be used for commercial properties?
Yes. Bridging loans are quite often used for commercial real estate purchases in a number of scenarios.
- It might be to quickly close on a desirable property that has come onto the market suddenly (probate sales, people going into long term care etc).
- It could be used to secure a property that has a foreclosure notice on it.
- A property that is pre-foreclosure, but has owners who need a fast sale, and are offering the property at an attractive discount.
- A bridging loan could also be used by a developer to begin a project. But because there is no guarantee, the loan will typically carry a high interest rate.
- It can also be used if a senior partner in a business wants to leave or retire, and another partner wants to continue running the business. This will allow the business to continue running smoothly during that time.
Who are the best bridging loan lenders?
There are many lenders, hundreds in fact, who can help you with bridging finance.
They are all different, with different fees and interest rates… the trick is to find the one that will off you the best deal based on your circumstances, and if you don’t choose the right lender, it could cost you hundreds, if not thousands of dollars more.
This is where the expert brokers we work with come in. They have access to, and a working relationship with all lenders, not just a select few, so they are in a better position to find the best deal for you.
Can I still get bridging finance with bad credit?
Yes. With the right advice from one of the brokers we work with who are experts at finding the right bridging finance for people with bad credit.
The advantage you have over a standard home loan is that the money you are borrowing is already secured against the equity you have in your property.
This makes it less of a risk to the lender.
Because it’s a bridging loan, you’ll need a deposit of 20% anway and this has to come from substantiated savings over at least three months.
When it comes to bad credit and bridging finance, the only issue the lender may have is if it affects your exit strategy i.e. your ability to pay off the loan when it comes due and your ability to keep up payments on your home loan.
It all depends on a number of factors such as –
- The age of credit history issue (the older the better).
- What the outcome of the issue was (whether it was finally settled or not).
- The type of the credit issue or judgments (such as a telco, utility or financial institution default). Generally, telco and utility-related defaults are less severe than financial default listings.
- Your more recent credit history.
- Your current employment situation.
They are experts when it comes to helping people with bad credit find bridging finance.
Why should I talk to a whole-of-market broker?
Not all brokers are the same. Some have access to just a few lenders, whist others, like the brokers we work with, have access to the whole market, so they can find the best deals for your circumstances.
The brokers we work with have passed a 12 module training programme and are experts in their particular area.
We don’t charge a fee and there’s no obligation, just the right advice every time. For a no obligation consultation click here.