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Bridging Loans

Short-term loans, known as “bridging finance” or “bridging loans,” allow you to buy a new home before selling your old one. While you’re still living in your present residence, bridging loans may also help with the cost of building a new home. Lenders usually give you 6 to 12 months to sell your current property and 12 months if you’re building a new home.

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How Does Bridging Loan Work?

When you take out a bridging loan, the lender often finances the purchase of the new home and takes over the mortgage on your current property. The total amount borrowed, known as the Peak Debt, consists of the remaining debt on your previous home’s loan, the new home’s contract purchase price, and any other expenditures associated with the acquisition, such as stamp duty, lender fees, and legal fees.

A bridging loan’s minimum repayments are often determined solely by interest. In certain circumstances, this interest may be capitalized and be added to the Peak Debt—until the existing home is sold.

The net profits from the sale of your first home, which include the sale price less any closing expenses such as selling agency fees, are applied towards lowering your Peak Debt. After that, the leftover loan becomes the End loan, which is subsequently serviced using a regular mortgage product.

Benefits

One of the most frequent dilemmas faced by first-home buyers is whether to buy something first and then sell it. A bridging loan is a type of short-term finance that is intended to “bridge” the time between selling your present home and buying your future one. A bridge loan provides you with:
  • The freedom to purchase your ideal home without having to sell your current one first
  • More time to get your home ready for sale
  • The capacity to escape inconvenience and transient living costs.

Caution

  • There are two valuations: one for your existing property and another for the new one you wish to purchase.
  • While you sell, you’re paying interest on two homes. The bank calculates and adds fees to the loan every day. Therefore, additional interest will accrue if it takes a long time for your property to sell. 
  • It may harm if the property is not sold quickly. If it takes you longer than six to twelve months to sell the home, higher interest rates may apply, and you will be required to pay P&I on peak debt to repay the loans. 
  • There is no redraw option available.
  • You cannot switch lenders.
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