What’s a Bridging Loan?

When buying a new home, it’s not uncommon for funds to afford it to be tied up in your existing home, which can be tricky when you’re planning to move straight from home to home. Typically, home owners will aim to sell their current property before buying the new one, which frees up the funds required. This ensures they can go into the buying game with equity. However, that’s not always the case. On occasion, timelines may shift, or the right property may pop up before you’ve managed to sell your current home. That’s when a bridging loan comes in handy.

What’s a Bridging Loan?

A bridging loan is a short-term loan that provides you with finance to “bridge” the gap between buying your new home and selling your current property. This loan is typically relatively small but needs to be repaid within 12 months of purchasing the new property. It’s worth noting that the longer it takes to repay the loan, the more you’ll pay in interest. Therefore, it’s in your best interest to repay the loan as soon as possible, when you’ve sold the previous property.

The Benefits of a Bridging Loan

A bridging loan is a specific finance solution for unique circumstances and is only advisable if you need to buy before selling. Some benefits of a bridging loan are…

• • Buy your dream property before you’ve sold.
  • Enjoy flexibility between buying and selling.
  • Avoid the hassle of short-term renting.
  • Have the flexibility to repay the bridging loan early at any time.

The Risks of a Bridging Loan

There are several risks to be aware of before using a bridging loan.

• • A bridging loan is an additional expense in your home buying journey. This means you’ll have to make an additional repayment in the first 12 months of your home loan. If your Loan-to-Value Ration (LVR) is less than 60% interest may be capitalised.
  • Like a regular loan, if you default on your repayments and the property is lost, you may still owe on your bridging loan
  • If you’re unable to sell the property in 12 months and repay the loan, you may risk a default on your home loan.
  • If you sell your home for less than expected, you may need additional funds to repay the bridging loan.

What Do I Need for a Bridging Loan?

• • Proof that you can afford both your new home’s mortgage, as well as the interest accrued on a bridging loan.
  • Some lenders may require you to have equity in your existing home. This can act as a deposit towards your new home.
  • A viable plan to sell your existing home, to prove you’re likely to repay the loan.
  • A good mortgage broker to aid you through the process, and advise if it’s the right solution for you.

What Alternatives are There?

Bridging loans are one solution to unique circumstances, meaning if it doesn’t suit your needs, it’s worth exploring other options.

Same-Day-Settlement

otherwise known as Dual Settlement or Simultaneous Settlement, sees you settle the purchase of your new home and the sale of your own home on the same day. This means you can transition seamlessly between homes, without having to rent short term. You’ll also, like with a bridging loan, only have to worry about moving once. However, this requires important planning and scheduling to ensure both settlements happen simultaneously. It likely requires the patience of either the seller of your new home or the buyer of your old home to accommodate your timeline. If anything changes timeline-wise, such as a delayed settlement, it can cause huge risks to the purchase of your home. It’s also worth noting that you’ll have to sell your home first on the same day to access the funds to buy your home. A Same-Day Settlement can be more trouble than it’s worth, which is exactly why a bridging loan can be useful. This is helpful if you want to avoid a gap between selling and buying.

Short Term Leases

If a bridging loan doesn’t suit your needs, short-term leases are the most straightforward process to bridge the time between properties. This can still be costly, as you’ll have to effectively move furniture twice. Depending on the size of the short-term rental, you may need to pay for a storage locker in between. Short-term rentals are also limited, as most property owners are looking for stable, long-term tenants. Renting a furnished property can be a feasible solution if the time between homes is shorter than about a month; however, these are typically pricier than a short-term rental property.

Rent Your Own Home!

If the new owners of your home are looking to use it as an investment property, you may be able to effectively act as their first tenants. You can agree to rent out the property while the purchase of your new home is finalised. They get tenants as a bridge while they search for someone to move in long-term. This is ultimately up to the new owners however, and if they’re planning to move in, you likely won’t have luck (Unless you like sleeping top-to-toe with the new homeowners).

No one moving solution fits all, which is why it’s important to rely on your support team. A good real estate agent, conveyancer and, of course, MoneyQuest broker can help to make the moving process as seamless and stress free as possible. From organising bridging loans to helping ensure all settlements stay on track, we’re here to help you. Reach out to MoneyQuest today.

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