How to Qualify for a Bridging Loan in Australia: Eligibility and Requirements
If you’re in the middle of buying a new property and haven’t yet sold your current one, you may be considering bridging finance. However, like all financial products, bridging loans come with specific eligibility criteria. This guide will take you through the key requirements to qualify for a bridging loan in Australia and highlight the process for obtaining one. Whether you’re a homeowner or investor, understanding these criteria can help you decide if bridging finance is right for you.
What is a Bridging Loan?
Before we delve into the eligibility requirements, let’s briefly recap what bridging finance entails.
A bridging loan is a short-term loan designed to "bridge" the financial gap between purchasing a new property and selling your existing one. These loans are usually offered for a period of 6 to 12 months, covering both properties' costs until your current home sells and you can transition to a standard mortgage on the new property. In the Australian market, bridging loans can be structured as closed or open loans, depending on whether your current property is sold (with a settlement date) or still on the market.
Key Criteria for Bridging Loan Eligibility
When applying for a bridging loan in Australia, lenders assess several factors. Here are the main criteria that determine whether you’ll qualify for bridging finance:
1. Sufficient Equity in Your Current Property
Equity is one of the most critical factors for bridging finance eligibility. Equity represents the portion of your home that you truly own, calculated by subtracting your outstanding mortgage from your property’s current market value. Lenders typically prefer borrowers to have substantial equity in their current property to reduce the risk associated with bridging loans.
Example: If your current home is valued at $700,000 and you have a remaining mortgage of $200,000, your equity would be $500,000.
While the required equity percentage varies by lender, most lenders look for a minimum of 20-30% equity to approve bridging finance applications. This equity acts as a form of collateral for the lender, covering the risk of financing two properties during the transition period.
2. Serviceability Assessment
Serviceability refers to your ability to make repayments on the loan, considering your income, expenses, and overall financial situation. Lenders conduct a detailed assessment of your serviceability to ensure you can manage both properties' costs, including your existing mortgage, peak debt (the combined debt across both properties), and any interest accrued during the bridging period.
When evaluating serviceability, lenders will review:
Income: Salary, rental income, business income, or other regular income sources.
Existing Debt Obligations: Credit cards, personal loans, car loans, or other financial commitments.
Living Expenses: Monthly household and living expenses.
Lenders may apply higher serviceability standards for bridging finance, particularly for open bridging loans, which lack a definite repayment timeline.
3. Clear Exit Strategy
An exit strategy outlines how you plan to repay the bridging loan within the agreed timeframe. This could involve:
Selling Your Existing Property: Most bridging loans are structured around the assumption that you’ll sell your current home to clear the peak debt.
Refinancing to a Long-Term Loan: In cases where you plan to retain both properties, some lenders allow borrowers to refinance the bridging loan into a long-term home loan.
The lender will want evidence of your ability to execute this exit strategy. For instance, if you’ve listed your property on the market, you may be required to provide the real estate listing or an estimated sale price from a professional valuer.
Key Bridging Loan Requirements
Once you’ve established eligibility, understanding the specific requirements will help you prepare for the application process. Here’s what lenders typically require for a bridging loan application:
1. Proof of Income and Employment
Income stability is essential in bridging loan applications. Lenders require proof of income, including:
Recent Payslips: Typically, lenders request payslips from the last three to six months.
Tax Returns: If self-employed, you may need to provide tax returns for the last two years.
Rental Income Statements: For investment property owners, evidence of rental income can boost eligibility.
Consistency in income and employment history adds strength to your application. It’s best to have been with your current employer for at least six months, as this demonstrates financial stability to the lender.
2. Property Valuations
Lenders typically require property valuations for both the new and existing properties to assess peak debt accurately. A valuation determines each property’s current market value, allowing the lender to set the loan amount.
There are two main types of valuations:
Full Valuation: A detailed valuation conducted by a certified professional, which gives an in-depth analysis of the property’s value.
Desktop Valuation: A less comprehensive but quicker valuation based on available data, often used if the lender is confident in the local property market.
Property valuations ensure that both properties are accurately valued, helping the lender determine the risk of lending.
3. Deposit Requirements
While bridging loans use the equity in your existing property as security, some lenders still require a deposit on the new property. The deposit amount varies depending on the loan size and lender policies. Generally, you’ll need a deposit of at least 5% to 10% of the new property’s purchase price.
4. A Good Credit History
Your credit score and history will significantly impact your eligibility for bridging finance. A good credit score (typically above 650 in Australia) reflects a responsible borrowing history, demonstrating that you’re less likely to default on the loan.
Most lenders review your credit file to check for:
Payment Defaults: Outstanding or overdue payments on previous loans or credit accounts.
Credit Enquiries: Multiple recent enquiries can signal financial distress, lowering your credit score.
History of Responsible Repayment: Evidence that you consistently meet repayment obligations improves eligibility.
If you have a low credit score, lenders may impose stricter terms or deny the application, as it increases the perceived risk.
5. Fees and Costs
Bridging loans often come with additional fees. Familiarising yourself with these costs will help you prepare financially. Common fees include:
Application Fees: A one-time fee charged when you apply for the loan.
Valuation Fees: The cost of property valuations for both existing and new properties.
Legal Fees: Any legal costs associated with setting up the bridging loan.
Exit Fees: Some lenders charge a fee if the loan is repaid before the end of the bridging period.
The fees vary by lender, so reviewing the lender’s fee structure beforehand is crucial.
The Bridging Loan Application Process
Now that you understand the criteria and requirements for bridging loans, let’s explore the steps involved in applying:
Step 1: Contact a Mortgage Broker
Bridging finance can be complex, so consulting a mortgage broker is a good idea. Brokers can help you assess your eligibility, understand lender requirements, and compare bridging loan products.
Step 2: Gather Documentation
The documentation for a bridging loan application is extensive. Prepare the following:
Proof of Income: Payslips, tax returns, and any rental income statements.
Property Valuations: Professional valuations of both your existing and new properties.
Exit Strategy Details: Provide evidence of your planned property sale or refinancing strategy.
Identification Documents: Photo ID, proof of residency, and any other personal identification required by the lender.
Step 3: Submit Your Application
Once you’ve gathered the necessary documentation, submit your application through your mortgage broker or directly with the lender. Approval times vary but typically take between two to three weeks, depending on the complexity of your application.
Step 4: Finalise the Bridging Loan Agreement
If your application is approved, the lender will issue a formal loan offer, outlining the terms and conditions of the bridging loan. Carefully review these details to ensure you understand the repayment structure, fees, and bridging period.
Common Questions About Bridging Loan Eligibility
1. Can You Get a Bridging Loan with Bad Credit?
While challenging, securing a bridging loan with bad credit is not impossible. Some lenders may consider your application if you have substantial equity in your current property and a clear exit strategy. However, expect higher interest rates and stricter terms.
2. Do You Need a Deposit for a Bridging Loan?
Most lenders prefer borrowers to have a deposit or minimum equity in their current property. The deposit requirement typically ranges from 5% to 10% of the new property’s purchase price.
3. What Are the Interest Rates for Bridging Loans?
Bridging loan interest rates are generally higher than those of standard home loans due to the increased risk and short-term nature. Rates vary depending on the lender, your credit profile, and the loan structure.
Conclusion: Is Bridging Finance Right for You?
Bridging finance offers a solution for those transitioning between properties, but it comes with eligibility requirements that may not suit everyone. Assessing your equity, income stability, credit history, and exit strategy will give you a good idea of whether you’re likely to qualify for a bridging loan.
Consulting with a mortgage broker, such as Mountain Mortgages, can help you navigate the application process, ensure eligibility, and compare bridging loan options. If bridging finance seems like the right fit, take the time to prepare thoroughly, ensuring that you meet all requirements to increase your chances of approval. By following these steps, you can make an informed decision and enjoy a smoother transition between properties.
At Mountain Mortgages, our team of experts is here to guide you through the bridging loan process and help you find the best solution tailored to your needs. Contact us today to discuss your eligibility and find out how we can support your property journey.
