What Is Bridging Finance and How Does It Work in Australia?

When you're in the process of buying a new property before selling your existing one, you may encounter a common challenge: the financial gap between the purchase and sale. Bridging finance, or a bridging loan, can be the solution to help manage this interim period. In Australia, bridging finance is specifically designed to cover this gap, enabling you to purchase your new home while you wait for the sale of your current property.

In this comprehensive guide, we'll delve into what bridging finance is, how it works in Australia, and essential considerations, including examples that reflect the current market. Let’s make sense of bridging finance and see if it could be a practical solution for your next property transaction.

What is Bridging Finance?

At its core, bridging finance is a short-term loan that helps homeowners "bridge" the financial gap when transitioning from one property to another. This type of finance is used when there’s a lag between purchasing a new property and finalising the sale of an existing one.

The key feature of a bridging loan is its short-term nature. Typically, bridging loans last between 6 to 12 months, making it a temporary financial tool rather than a long-term solution. In Australia, bridging loans are typically offered by banks and other financial institutions and come with distinct terms and conditions.

How Does Bridging Finance Work in Australia?

Understanding how bridging finance operates in the Australian market is essential. When you take out a bridging loan, your lender will consider both properties involved: the new property you're purchasing and the current property you're planning to sell.

Here’s a breakdown of how bridging finance functions:

1. Loan Structure

• Bridging loans generally combine the value of the current and new properties, minus any deposit or equity the borrower contributes.

• The lender establishes a peak debt, which is the sum of the remaining mortgage on the existing property and the cost of the new property.

2. Types of Bridging Loans

• Closed Bridging Loan: This type of loan has a fixed repayment date, often used when a settlement date for the current property is known. It’s suitable if you’ve already sold your property, but the settlement period hasn’t arrived.

• Open Bridging Loan: This type doesn’t have a fixed end date, making it ideal for those who haven’t sold their current property yet. However, lenders usually set an upper time limit, typically 6 to 12 months.

3. Repayment

• Most bridging loans allow interest-only repayments during the bridging period. The interest can be added to the peak debt, which means you only start paying down the principal after your existing home sells.

Bridging Finance Example in Australia

Consider this scenario:

• You’ve found your dream home and want to secure it before selling your current property.

• Your new home costs $800,000, and you still owe $300,000 on your existing property, which is expected to sell for $600,000.

Here’s how a lender would structure the loan:

1. The peak debt would be calculated as $1.1 million ($800,000 for the new property + $300,000 remaining on the existing property).

2. When your current property sells for $600,000, the proceeds will be applied to the peak debt, reducing it to $500,000.

3. Your final loan balance is $500,000, which becomes your ongoing mortgage on the new property.

During the bridging period, you may only need to pay interest on the peak debt amount. Once your current home is sold, your regular mortgage repayments commence based on the reduced loan balance.

Key Advantages of Bridging Finance

Bridging finance offers unique benefits for Australian homeowners in the process of buying and selling property. Here are the top advantages:

• Avoiding Temporary Accommodation: Bridging finance enables you to move directly from one property to another, eliminating the need for temporary housing arrangements.

• Securing Your Ideal Property: With bridging finance, you don’t need to wait until your existing property is sold, allowing you to act quickly in competitive markets.

• Flexible Repayment Terms: Most bridging loans offer interest-only payments during the bridging period, easing the financial burden until your existing home is sold.

Considerations Before Taking Out a Bridging Loan

Despite its benefits, bridging finance may not suit everyone. Here are key factors to consider before applying:

1. Costs and Fees

• Bridging loans can carry higher interest rates than standard home loans. Additionally, fees such as application and valuation fees might apply. Assessing these costs against your financial situation is essential.

2. Loan Approval Conditions

• Lenders often have strict conditions for bridging loans, including evidence of a concrete plan to sell your existing property. Some lenders may require a minimum equity percentage in your current property to qualify.

3. Market Conditions

• If the property market is slow or prices are dropping, selling your current property within the bridging period may be challenging. Delays in selling could extend your interest repayments, increasing costs.

4. Risk of Higher Debt

• Because bridging loans cover both properties, your debt level temporarily increases. This can impact your borrowing capacity for future financial needs and increase your risk exposure.

Bridging Finance Options in Australia

Australian lenders provide a range of bridging finance options with varying terms. Here’s a quick look at some common options:

1. Capitalised Interest Bridging Loans

• In this arrangement, the interest is "capitalised" or added to the loan balance during the bridging period. This is convenient if you prefer not to make regular repayments during the transition.

2. Simultaneous Settlement

• This option requires both properties to settle on the same day, allowing you to avoid bridging finance altogether. While challenging to coordinate, it can save on bridging loan interest.

3. Extended Bridging Loans

• Some lenders offer extended bridging loans, which can last beyond 12 months. This option may come with higher costs but can be helpful in cases where property sale timing is uncertain.

How to Apply for Bridging Finance

The application process for a bridging loan in Australia is similar to a traditional mortgage application, but there are additional considerations due to the involvement of two properties.

1. Speak with a Mortgage Broker

• Bridging finance can be complex, so consulting a mortgage broker is often beneficial. Brokers can help you navigate lenders' specific requirements and compare products for the best option.

2. Gather Documentation

• Documentation includes proof of income, property valuation for both the existing and new property, and details of your current home loan.

3. Submit Your Application

• After gathering necessary documentation, your broker or lender will submit your application. Approval timeframes vary, but having clear documentation can streamline the process.

4. Repayment Plan and Exit Strategy

• Lenders will want a clear exit strategy—proof that you have a plan to repay the bridging loan within the agreed timeframe, typically through the sale of your existing property.

Common Questions About Bridging Finance

1. How Long Can You Have a Bridging Loan?

• In Australia, bridging loans typically last between 6 to 12 months. Some lenders may offer extended periods, but terms and costs vary.

2. What Interest Rates Apply to Bridging Loans?

• Interest rates for bridging loans are generally higher than standard home loan rates. Rates can vary based on lender, loan amount, and your financial profile.

3. Do You Need a Deposit for a Bridging Loan?

• Generally, lenders prefer borrowers to have some equity in their current property, although specific requirements vary. Having a deposit or a certain level of equity can improve approval chances and loan terms.

4. Can You Get a Bridging Loan with Bad Credit?

• Obtaining bridging finance with bad credit is challenging, as lenders consider it higher risk. However, some lenders may offer options depending on your financial circumstances and equity in the existing property.

Is Bridging Finance Right for You?

Bridging finance can be an effective tool to manage the financial gap between buying a new home and selling your current property. However, as with any financial decision, it’s essential to understand the potential costs, risks, and market conditions.

Before deciding on a bridging loan, consider your financial situation, property market trends, and whether you have a clear plan to repay the loan. Working with a mortgage broker can help you understand your options, compare products, and choose a bridging loan that aligns with your needs.

At Mountain Mortgages, we specialise in helping Australian homeowners navigate complex financing options, including bridging loans. Our team is here to provide expert guidance, support your transition, and help you achieve a smooth property purchase. Contact us today to discuss your needs and discover how we can support your property journey.