A bridging loan, also known as a relocation loan, is a home loan that can be taken out to purchase a new property while waiting to sell or settle on your current home. This means that during the bridging period, the time where you are waiting to settle on your current home, you will have the equivalent total of two loans.
Bridging in a nutshell:
- Short term loan of 6 to 12 months
- Approval for bridging depends on the lender, the property type and the ability to service (pay the loan). Some lenders require you to be able to service the loan based on the peak debt. The peak debt is when you have both your loan for your current home and loan for your new home.
- Lenders mortgage insurance is not usually available
- The maximum loan to value ratio is dependent on the lender.
- Repayment options during the bridging time is also lender dependent. Some will have an interest only repayment during the bridging period.
Eligibility for bridging loan:
Outside of normal servicing and lending requirements, you will need to have
- A valuation performed on your existing property
- Contract of sale for your new property.
During bridging period/peak debt:
- If your current lender does not provide bridging finance and you are refinancing to a new lender, your refinance settlement must be on the same day as your new property settlement
- When applying for a bridging loan, your lender will use both properties to support/secure the loan (cross-collateralisation).
- Depending on the lender, you may be required to make interest only repayments during the bridging period, unless the interest is being capitalised.
- During the bridging period, interest is calculated daily on the total loan balance (that is, on both loans/peak debt)
End of bridging period
- As the borrower, you must sell and settle your current property before the bridging loan expiry period.
- The pre-agreed principle is repaid and end debt, the loan on your new property, will be a standard home loan product
Other Options to Bridging Finance
- Sell before your buy: This the most obvious option. Selling your current home before you buy your new home ensures you have the finance to buy your new home. If all your ducks do not align then…
- Negotiate Settlement Time: This can work in both scenarios of buying before selling or selling before buying. If you have bought before you have sold, part of your offer conditions could be to have a longer settlement. This can give you time to sell your current home. When you then sell your home, you can then stipulate settlement period. This will be dependent on when your new home settles.
Pros and Cons of a bridging loan
- Avoid the need to Rent: If you have not found a new home or there is time between each settlement period. Having a bridging loan can help you avoid the hassle of having to rent a property.
- Repayments: Depending on the the bridging loan, during the bridging period, you only need to meet your current mortgage repayment
- Convenience: Having a bridging loan allows you to buy your new property straight away, with out having to wait to sell your current property. This allows you to sell your property at a reasonable price without the stress.
- Termination fees: depending on your loan type, if your current lender does not provide bridging loans, you may need to refinance your existing loan with another lender. This may mean that you face early exit fees. This particularly the case if you are in a fixed interest rate loan.
- Interest rates: If you have bought a new home before you have sold your current home, and you haven’t sold your current home before the bridging period, you may face a higher interest rate for your loan
- Interest: The longer that it takes to sell, the more interest that you accrue. If it takes a while to sell your home, the longer you have bridging finance and longer your have a higher loan amount and therefore more interest.
- Valuations: Having a bridging loan may mean the requirement of two valuations. One for your current home and one for the property you have purchased. There may be costs associated with valuing both properties.