Our Pick Of The Best Bridging Home Loans For Australians

A bridging loan is a finance product that helps you cover the costs of buying a new home or apartment before you’ve sold your current property.

Bridging loans make it possible to borrow more than you could have otherwise so you can seamlessly cover your current mortgage, the deposit and other settlement costs on a new home, without waiting on the funds from the sale of your existing house.

A bridging loan is usually:

• Short-term: With loan terms between three and 12 months, which can’t be extended.
• Secured: Your eligibility and how much you can borrow depends on having equity in an existing property.
• Interest-only: So you only repay the interest owed on the principal amount borrowed.

Here’s how a bridging loan typically works:

• The lender takes over the loan balance owing on your current home. Additionally, the lender provides you with a loan to cover the purchase and settlement costs of the new property you’re buying.
• For the term of the bridging loan, you’ll accrue interest based on the total amount (aka ‘peak debt’). You may be required to make regular interest-only payments during the term.
• Once you’ve sold your old home, you can fully pay off the original mortgage amount plus interest accrued (provided the sale covers it).
• You then transition to a standard home loan to pay down the debt on your new property.

“The interest rate offered during the bridging period usually is higher than a standard home loan,” according to broker Laura Cartmill.

“Some lenders offer a structure where you only pay interest on the loan that you’ve drawn down, if the loan is split into separate parts. But in most cases, interest is charged on the full loan amount,” she said.

Interest capitalisation during the bridging period may also be offered, meaning you don’t make any repayments during the loan’s term—but pay back all the interest owed in one lump sum at the end.

Bridging loans are used by owner-occupiers who are moving, downsizing or upsizing, as well as property investors. For example, an investor might use a bridging loan to secure a property that they plan to renovate and sell within a year, using the proceeds to pay off the bridging loan.

There’s two main types of bridging loans offered by banks and other lenders: open and closed. Cartmill said a closed bridging loan is easier to secure because it’s predicated on you having a fixed repayment date lined up that is based on the signed contract for the sale of your current home.

“Lenders like to see that you have a clear plan and timeline in place for repaying the bridging loan once the property sells,” she said.

“Therefore if you already have a contract or settlement date it can make it easier to get approved for the bridging loan as it reduces the lender’s perceived risk.”

Getting an open bridging loan—where you’re given potentially up to a year to organise the sale—may require more equity or meeting other conditions. Laura Cartmill cautions that not all lenders offer bridging loans and that working with a mortgage broker can be helpful to navigate the available lending options.

When developing the list above we considered:

• Is the lender reputable and do they provide transparent information about their bridging loan products online?
• Is the interest rate offered competitive compared to most bridging loans on the market?
• Are interest-only payments and/or interest capitalisation available?
• Is the post-bridging home loan fully-featured with a competitive interest rate?
• Are the fees, including application and ongoing account keeping fees, clearly explained and reasonable?
• What is the Loan to Value Ratio (LVR) that is required?

Bridging loans can be a great fit if you’re faced with a cash-flow shortfall when changing homes. But you’ll need to be confident your current property will sell quickly, for the price you want.

Pros

• Move quickly. No need to “risk missing out” on your dream home is a key benefit, says Laura Cartmill, given you’ll gain immediate access to funds to secure your desired property. With limited high-quality properties available in a tight market, this can be a huge benefit.
• Save money on rent and relocation costs that arise from having to find a temporary place to live after selling the home you were living in first, such as storage and moving services. Plus you won’t have the hassle of moving twice.
• Competitive interest rates compared to other short-term financing options are another boon, according to Cartmill. Plus, the loan’s flexible repayment terms gives your budget more breathing space.

Cons

• Bridging loan interest rates and fees may be higher than a standard home loan, and interest may be calculated daily. The longer it takes to sell your previous property and pay off the bridging loan, the more interest you’ll pay.
• Term restrictions can put you under pressure. If you don’t (or can’t) sell your property in time, the bank can legally step in and sell your home. They might also charge a fee or a higher rate of interest.
• Risk of over-leveraging if your property doesn’t sell for as much as expected. “If your home doesn’t sell for as much as you owe on the mortgage, the shortfall must still be repaid,” Cartmill said.

It’s important to keep in mind that bridging loan availability and product features vary between lenders, and simply being able to afford repayments doesn’t mean you’ll qualify.

Some banks may not offer you a bridging loan if you’re not a customer or there won’t be an ongoing debt (aka residual or end debt). ANZ offers bridging loans to new customers if they’re eligible, however they require that you refinance your current home loan to ANZ first. Commbank requires that your end debt is at least $250,000.

In addition to the usual checks and balances to assess your financial situation, a lender will require a suitable valuation to confirm your current property is saleable and in good condition. The timeframe to apply and be approved can be similar to a standard home loan, but it may also take longer depending on the complexity of the valuation process.

Steps to take to apply for a bridging loan:

• Contact an adviser at your preferred lender, or get in touch with a mortgage broker, to clarify whether you qualify for a bridging loan or if there are other finance options they’d recommend.
• Prepare your financial documents including proof of your income and assets, outstanding debt amounts, estimates of your living expenses, existing property details, plus valid identification.
• Book an appointment or make an enquiry with your chosen lender once you’re ready to apply, or begin an online application if that’s possible.

Mortgage broker Laura Cartmill says the first eligibility hurdle is whether you have sufficient equity in your home so it can be used as security for the loan. Equity is calculated by subtracting any outstanding mortgage amount from the current value of the property.

“The amount of equity you need will vary between lenders, but most require at least 20% to 30% equity in the property,” she says. “If you have a larger amount of equity, you may be in a stronger position to secure a better bridging loan rate.”

Potential lenders will also want evidence that you can afford to service the loan during the bridging period and beyond.

“This includes considering your income, outgoings, credit history, and the potential sale price of your existing property.They will assess your financial position to ensure that you can manage the repayments for both the bridging loan and any existing mortgage until your existing property is sold.”

As a short-term financing solution, bridging loans often differ from standard home loans. The most obvious difference is that a higher interest rate is usually applied during the bridging period. Also, you’ll likely be limited to interest-only payments, and may not be able to access offset accounts or redraw during the bridging period.

Part of the difficulty in comparing bridging loans is that you need to review and be happy with the interest rate and features of both the bridging loan product and the standard home loan you’ll transition to. Unless, that is, you plan to refinance to another lender later.

An alternative to applying for a bridging loan is to arrange a simultaneous settlement — that’s where the settlement date of the sale contract on your current home lines up with the settlement date on the purchase contract of your new home, so the funds can be immediately transferred.

Some homeowners choose to hold onto their first home and use it as an investment property. That can work well provided the rental income is enough to cover the property’s mortgage and upkeep, and home owners are across the tax implications of an investment property, as well as the maintenance requirements.

If you’ve built significant equity in your current property, your bank will generally be open to providing additional finance, and there’s a range of alternatives to bridging loans that you can explore. For example, depending on how much money you need you might be better off with:

• A top-up of your current home loan amount.
• A separate, supplementary loan with your current lender.
• A line of credit from a lender with flexibility around repayments.

Additional editing: Kevin Pratt