The thought of having to take out bridging finance is enough to send a chill down many homebuyers’ spines.
Bridging, or “in-between”, loans allow you to own two properties at once – the home you just bought and the home you need to sell to pay for it. So a bridging loan effectively buys you time. Rather than having to offload your property urgently to pay for some or all of your debt, you get the chance to sell in circumstances that can maximise your sale price.
For the risk-averse, the thought of financing two mortgages is enough to send them to therapy. They may have bought a property before selling first, motivated by emotion (“We love this house”) or misplaced optimism (“Of course we’ll sell our house quickly”), and possibly against their better instincts. But getting a bridging loan is not nearly as expensive or as scary as it used to be. For some, a little uncertainty is a small price to pay to have their dream property straight away.
Determining how much you can borrow comes down to a simple formula. Add the amount you owe on your home loan with the value of your new home, and then subtract the value of your current home. Throw in the usual buying and selling costs such as stamp duty and the result is the principal of your new bridging loan. If your current mortgage is relatively small you have a distinct advantage. The more equity you have in your current home, the less you will need to borrow.
A bridging loan in Australia can be paid back as interest-only and lenders set a time limit, typically six months, for you to sell your current property (although they may grant you an extension if a sale falls through, for instance). This means if you sell within a month, you only have to pay interest for that month, and the rest of the debt is capitalised for up to nine months. What you’re left with once the sale goes through and the proceeds are put towards the loan is your new mortgage, which reverts to a principal plus interest arrangement (or remains interest-only, if you prefer).
The good news is that taking out a bridging loan is not as expensive as it was before deregulation, when banks assessed in-between loan applicants as high-risk clients. Fees and interest rates are generally in-line with a standard, non-discounted variable rate loan, though applicants are required to pay for home valuations (although one might be paid by the lenders).
Undoubtedly, the easiest way for someone to organise bridging finance is through their current lender, which should be familiar with their financial history and repayment record. But many borrowers see these circumstances as a chance to refinance and look for a better rate or service.
Phillip Jiang, from unohomeloans.com.au, has been a mortgage coach for 15 years. He says bridging loans are not for everyone, and often counsels clients to look for alternatives. “I’ve often told clients the best thing is to sell the property and buy another one, otherwise it’s too complicated, too stressful,” he says.
As with refinancing, those looking to take out a bridging loan should seek trusted advice and not borrow anywhere near the maximum allowed, which is generally 80% of the property value. You should know going in that bridging finance rates are typically higher than normal loans. And, Jiang says they should also be prepared for potential complications. He cites the example of a couple that were paying a mortgage on a flat in Neutral Bay, on Sydney’s north shore, which was valued at $950,000. Based on this valuation, they bought a coastal property for $600,000. When they put their flat up for auction, it only sold for $780,000, leaving them with a significantly greater debt than expected. “At the settlement of their existing property, they had to increase the loan amount the bank approved because the sales proceeds were just not enough to pay out the bridging portion,” he says.
“Before a client looks at a bridging finance loan, they need to speak to the agent to see how long it will take to sell their property for their reserve price. They also need to keep in contact with their solicitor. If they can buy first, sell later within a stretch of two weeks, a solicitor can make a simultaneous settlement possible. If the first two options are impossible, then they have to go to the third option, which is applying for a bridging loan.”
Jiang says nervous sellers can often apply for a bridging loan as a backstop. “One of my customers applied for bridging finance and it was approved. On the first weekend she put her existing property on the market, it was sold on the spot. She came back to me and said, ‘Look, I don’t need bridging finance anymore’. So she didn’t proceed with the application.”
Yes, in some circumstances, bridging finance can even bring peace of mind.
Don’t rush into buying first, selling later – seek trusted advice before applying for a bridging loan. Be realistic about what your property is actually worth – make sure you don’t rely on selling at the full valuation price. It may be possible to avoid a bridging loan if property settlement dates can be aligned.