Whether you’ve outgrown your house, are looking to scale down, or have discovered your dream home, sometimes it suits to buy a new property before selling your current one. In such a situation, you might need bridging finance. Canstar explains the ins and outs of bridging loans and whether one could be the best choice for you property situation.
What is a bridging loan?
A bridging loan, also known as a bridge loan or bridging finance, is a short-term loan used to “bridge” a gap between two financial transactions. It is typically used when someone needs funds quickly but has not yet secured long-term financing or needs to complete a transaction before a longer-term source of funding becomes available.
Bridging loans are often used in real estate transactions to allow a homebuyer to secure a home purchase while awaiting the sale of their existing property.
Bridging loans are typically short-term loans that come with higher interest rates than traditional mortgages or loans. They are designed to be repaid quickly, often within six to 12 months. Bridging loan terms and interest rates can vary depending on the lender, the borrower’s creditworthiness, and the specific circumstances of the loan.
What are the types of bridging loans?
Closed bridging finance
Closed bridging loans occur when the sale on both properties (the new home, and your current home) are unconditional, and all you need to do is bridge the gap between the two settlement dates. The maximum term for closed bridging finance is 12 months.
Open bridging finance
Open bridging loans occur when you want to buy another property without having sold your current home first. Your bank will work with you to structure your lending for up to six months or until the property is sold (whichever comes first) to ensure it’s manageable. This could include some or all of the lending being on interest-only terms, subject to approval from your bank.
When is a bridging loan used?
Here are some common scenarios where bridging loans may be used:
Buying a new home
Homebuyers may use bridging loans to purchase a new property before selling their existing one. This allows them to secure the new property while waiting for the sale of the old one.
Property developers may use bridging loans to fund construction or renovation projects before obtaining permanent financing or selling the completed project.
What are the risks of bridging loans?
If things don’t go as planned, the benefit of buying a new home before selling your old one can become a problem. If your old home doesn’t sell quickly or for as much money as you thought, it can create financial stress because there’s a lot of risk involved. These risks include:
- High interest rates: bridging loans typically come with higher interest rates compared to traditional mortgages or other types of loans. The cost of borrowing can be significant, especially if the loan is extended for a more extended period than originally planned.
- Existing mortgage: if you haven’t paid off your current home, you will need to continue mortgage repayments while paying the interest on your new home
- Inability to sell your home: your home might not sell within the loan period, and you could end up stuck covering two full mortgage payments
- Selling your home for less: your home might sell for less than you hoped for, and you may need to apply for an additional loan to cover the shortfall
Alternatives to bridging loans
A bridging loan is not the only option to consider when buying a new house before selling your existing one. Other options could include:
- Altering the purchase contract: Depending on your circumstances, it might be possible to add a “subject to sale” clause on the contract for your new home. This means that the contract on your new home wouldn’t become unconditional until you sold your existing home. Consult a qualified professional for advice before considering this option.
- Negotiating a longer settlement period on your new home: This could allow you some extra time to sell your existing home before your loan for the new one begins.
If you are considering taking on a bridging loan, it could be a wise idea to also consider seeking financial advice from a suitably qualified professional.
About the author of this page
This report was written by Canstar Content Producer, Caitlin Bingham. Caitlin is an experienced writer whose passion for creativity led her to study communication and journalism. She began her career freelancing as a content writer, before joining the Canstar team.