A bridging loan is a short-term loan that can help you buy a new home before selling your existing property.
While a bridging loan can be a great solution, it’s important you carefully weigh up the pros and cons as there are risks involved.
Breakthru Home Loans can help you explore all your options, including alternative ways to finance your property purchase.
Some buyers who purchase a new residence retain their existing home and convert it into an investment property. Most, though, sell their existing home so they can afford to buy their new residence.
That forces them to decide between these three options:
This is the most straightforward option from a finance perspective. When you sell your first property, you’ll pay off your home loan from the sale proceeds – and any spare money can then be used to fund the deposit and transaction costs on your next property purchase. The downside, though, is that you’ll have to move twice – once to your temporary home and once to your new home (whenever you end up buying it). Another potential downside is that if you complete these two transactions in a rising market, the longer the process takes, the more you’ll have to pay for your new home.
This is trickier from a finance perspective, because it means, for the short-term, that you need two home loans at the same time – one for your existing home (that you haven’t yet sold) and one for your new home. That second loan is the bridging loan, because it acts as a bridge that allows you to move from one home to another. The big advantage of a bridging loan is that you only need to move once. Also, if you move in a rising market, you get to buy earlier (when prices are lower) and sell later (when prices are higher).
If you’re wondering whether a bridging loan is right for you, the Breakthru Home Loans mortgage broker team would be happy to discuss your options with you.
As mentioned above, if you decide to buy first and sell second, you can use a bridging loan to finance the purchase of your new home.
Here’s how bridging loans work:
You can use bridging loans not just to buy a second property but also pay the associated transaction costs.
You generally use the same lender for the two home loans. The combined loan amount is known as your ‘peak debt’.
Bridging loans are short-term facilities and generally interest-only. Usually, you don’t have to pay these interest payments out of your pocket; instead, they get added to your peak debt.
When you sell your first property, the sale proceeds are used to pay down some of your peak debt. This new, smaller debt is known as your ‘end debt’.
To get a bridging loan, you’ll need to have exchanged contracts on the sale of your first property. You’ll also need to prove your creditworthiness in the same way you would with a regular home loan.
Of course, a mortgage broker can help you with the process.
Once you’ve secured the bridging loan, you’ll generally have to complete the two transactions in either six months (if you’re buying an existing property) or 12 months (if you’re buying a new property). That said, conditions vary from lender to lender.
If you fail to complete the two transactions in time, your mortgage broker can ask the lender for an extension – but the lender would be entitled to refuse. In that case, the lender could demand you immediately repay the loan. So if you decide to take out a bridging loan, you need to be willing and able to buy and sell within the allotted time.
As you can see, there are pros and cons to bridging loans, as well as risks.
Don’t worry if bridging loans seem confusing – an expert mortgage broker, like Breakthru Home Loans, can explain the process to you in clear terms and model different scenarios with you.
Your mortgage broker could also let you know whether a bridging loan would be suitable for you, based on your personal circumstances.
Wondering if a bridging loan is right for you? Contact us to discuss your options.