Bridging the gap.

What is a bridging loan?

If you’ve found your next home and need more time to sell your old home, a bridging loan could help you finance both properties.

A bridging loan is an additional short-term loan (issued for up to 12 months) that you take out on top of your current loan. This means during the bridging period you’ll have two loans, both of which are being charged interest.

When you sell your old home the bridging loan will be repaid from the net sale proceeds. While bridging loans can be a great option in some circumstances, they’re not for everyone. To help you decide if bridging finance is right for you, there are a few things you should bear in mind.

Benefits of a bridging loan can include:

• Not missing out on your dream home - A bridging loan can help when you’ve found ‘the one’, but haven’t started the process of getting your current home ready for sale.

• Avoid paying rent in the interim - It can be stressful selling your current home, particularly if you need to move into a rental property, pay rent and then move your family again once you’ve found your new home.

• No repayments required during the bridging period - On a bridging loan you don’t need to make any repayments during the bridging period, however you have the option to do so, which will reduce the overall interest charges.

• Help with upfront costs - You may choose to add upfront costs such as stamp duty and legal fees to your bridging loan if the property value and equity in your current home is enough.

Potential downsides to a bridging loan:

• No redraw facility - If you choose to make payments during the bridging loan term, you won’t be able to access those funds later

• Paying interest on interest - As you don’t make any payments on the bridging loan, the interest is added to the balance each month and you’ll end up paying interest on this interest.

• A short-term solution - Bridging is a short¬ term loan, so make sure you understand the property market and how long your style of property will take to sell. And remember, because you’re effectively adding interest to the loan amount, the longer it takes to sell your property, the bigger your interest payments are likely to be.

• The risk of overestimating - You’ll need to have a good idea of what your current home will sell for, so that you can budget properly for the new loan payments.

• Greater financial risk - Before you commit to a bridging loan, make sure you have a Plan B in place, just in case your home doesn’t sell as quickly as expected. Can you temporarily stay at a friend’s or relative’s house, rent-free? Or maybe you’d consider placing short-term tenants in your existing property to help keep your interest costs covered while you’re trying to sell?

• Two properties to value - A bridging loan may require two property valuations, which means two valuation fees.

• Liability for shortfall - It’s important to note that when your existing home is sold, the net sale proceeds will be applied initially to repaying the full balance of the bridging loan, including any accrued interest and fees. Where there is any shortfall, you’ll continue to be liable for any remaining debt.

  
  

Types of bridging loans.

Closed bridging loans.

If you already have a signed Contract of Sale on your current property, you’ll know the date when your home will be sold and funds received. You’ll then need to pay down the bridging loan, plus any accrued interest and fees, on this date.

Open bridging loans.

If your current home is not yet sold, a bridging loan can be arranged for a maximum 12 months. You’ll need to be confident that your home will sell in the market conditions at the time. Your Lender can discuss a backup plan in case the sale of your home doesn’t go ahead as planned.

How much can I borrow?

With a bridging loan you can borrow up to 80% of the combined property value. This is the value of your existing home plus your newly purchased home.

Daniel* 39, Sunshine Coast

Daniel has found his dream home earlier than expected. As he hasn’t sold his existing home, he’s looking for a bridging loan to tide him over.

*Not a real customer

Let’s do the numbers.

Daniel’s current home is valued at $550,000 and has a current home loan of $200,000. He’s purchased a new home and is looking to borrow the full purchase price ($600,000) plus associated costs ($30,000)*, the total of which comes to $630,000.

The total loan needed would be $830,000 ($200,000 + $630,000) against a combined property value of $1,150,000 ($550,000 + $600,000). Here’s how we determine what Daniel needs to borrow as a ‘bridging loan’:

For illustrative purposes only. Actual results will vary depending on your individual circumstances. Remember, due to the risks associated with this type of loan, you should only be considering bridging finance if you have a large amount of equity in your current home. If you don’t have sufficient funding or security, then you may find yourself paying far more in the bridging period than you can actually afford. *This is a rough estimate of associated purchase costs. In addition to this, you will usually have to pay stamp duty and government fees, which vary considerably depending on the state or territory in which the property is located.

This information has been prepared by PHA Financial Services and does not take into account your objectives, financial situation or needs. Before acting on this information you should consider whether it is appropriate to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. The information provided was accurate at the time of publication and changes in circumstances after a document is published may impact on the accuracy of information. Some information may have been collated from various third parties and we make no assertion that the information was originally ours.