How Bridging Loans Work: Buy Your Next House Before Selling
Stuck between buying your dream home and selling your current one? Bridging home loans are a great solution to this real estate challenge. These loans let you buy your new house before your existing property sells.
A bridging home loan serves as a short-term financing option that usually runs for six to twelve months. The loan's interest accumulates and you pay it back after selling your existing property. To cite an instance, with a total loan of $800,000 and an expected return of $500,000 from your current home's sale, your final loan would be $300,000. Note that bridging loan rates tend to be higher than regular home loans - something to think over before taking this path.
The benefits of bridging loans outweigh these higher costs. You won't need temporary housing, can time your sale better, and move fast in competitive markets. Most lenders need your total end loan to stay under 80% of both properties' value, including stamp duty and legal fees.
Bridging finance could be your perfect strategy if you plan to sell your current home within six months. The settlement takes 60 to 90 days typically, which gives you enough time to handle both properties during the switch.
What is a Bridging Home Loan and How Does It Work?
A bridging home loan creates a financial "bridge" between buying your new property and selling your existing one. This short-term financing solution lets you use your current home's equity as security for the deposit on a new property.
The lender takes over your existing property's mortgage and finances your new home purchase when you get a bridging loan. Your "Peak Debt" combines your current home loan balance, new property's purchase price, and other costs like stamp duty and legal fees.
Lenders typically give you 6 to 12 months to sell your existing property. Construction projects might need up to 12 months. You don't make repayments during this time because interest gets added to your total loan amount.
The sale proceeds from your existing property immediately reduce your Peak Debt. Your remaining amount becomes the "End Debt" and turns into a standard mortgage that needs regular repayments.
Bridging loans come in two varieties:
- Closed Bridging Loans: These need a fixed repayment date and work best when you know your sale date
- Open Bridging Loans: These give you more flexibility without a fixed repayment date but must be paid within the agreed term
Your combined loans (including added interest) can't exceed 80% of both properties' combined value. Your end debt LVR must also meet standard lending requirements.
Understanding the Bridging Loan Process
Your trip to get a bridging home loan starts after you find your next property but haven't sold your current home yet, and will have a different application process than regular mortgage applications.
The first thing you need to do is talk to a lender or broker about your situation and get a quote. The lender will send you a formal offer letter with loan terms and security details if you want to move forward. You'll need to submit documents of all types, like income proof and property information.
Bridging loans take 3 to 10 days to approve, but complex cases might need up to 21 days. Your approval time depends on how complex your deal is, your credit score, and your property's value. Properties with better appraisals and loan-to-value ratios usually get approved faster.
After approval, the lender's lawyers prepare security documents and set up property valuation if needed. The loan money transfers electronically within one to two days after both lawyers have signed documents.
During the bridging period (up to 12 months), you only pay interest. The interest adds up daily and you pay it monthly, so a longer sale time means more interest costs. Most lenders want proof that you can handle payments on both properties during this time.
The money from your current property's sale goes straight to reducing your bridging loan. The remaining amount (your "End Debt") becomes a standard mortgage that you pay regularly.
Call your lender right away to discuss options if you have trouble selling your current home during the bridging period. Note that lenders rarely extend beyond 12 months without extra conditions.
Benefits and Risks of Buying Before Selling
The choice between buying your next home before selling your current one needs a careful look at several key factors. Bridge loans can make this happen, but you need to understand what it all means.
Buying before selling comes with clear advantages. You won't deal with temporary housing headaches or pay for multiple moves and rent. Smart timing in rising markets lets you lock in better value for your new purchase while potentially selling your current home for more later. On top of that, it gives you breathing room to find the perfect home without rushing.
This path does come with its share of risks. Managing two mortgages at once stands out as the biggest challenge. Bridge loans usually carry higher interest rates than regular mortgages, which adds to your financial load. Your situation could get tough if your home doesn't sell within the expected timeframe - usually all but one year.
Money matters are a vital part of this decision. Lenders typically want you to have about 50% equity in your current home to qualify for bridge financing. The sort of thing I love to point out is that you might need extra cash if your property sells for less than you hoped.
Quick-sale pressure might force you to accept less money than you wanted. You could also end up making higher offers on new properties just to convince sellers to wait while you sort out financing.
People with steady income and good equity find buying first gives them more options. Renting out your current property is a great way to get help with those extra loan payments.
Whatever path you choose, you need a full picture of your finances. Run the numbers to see if you can handle bigger payments and create a backup plan. Your property might take longer to sell or go for less than you predicted.
The Benefits of Working With An Experienced Broker
Getting through the complexities of bridging home loans can feel overwhelming. A mortgage broker becomes your financial partner and brings many advantages throughout your borrowing experience.
Brokers give you access to a vast network of lenders, even those not readily accessible to most people. Your chances of finding competitive rates and budget-friendly terms increase with more options that match your needs. Banks can only offer their own products, but brokers search the entire market for you.
Mason Finance's mortgage brokers can help you find the right bridging home loan options for your unique circumstances. We'll guide you through the complexities and find the perfect solution for your property transition. Get in touch today.