Bridging Finance
The Property Solution More Australians Should Understand
Buying and selling property is stressful enough, without adding the additional pressure of a looming settlement in the mix.
Timing rarely works perfectly. The home you want appears before your current property is sold. An investkent opportunity presents itself unexpectedly. A downsizing decision needs to happen now rather than six months from now. This is where bridging finance can play an important role.
Yet despite being available for many lenders, bridging finance remains one of the least understood lending solutions in the market. Many borrowers either do not know it exists or assume it is too expensive or complicated to consider. Lets break it down a bit and see what its really about
What is a Bridging Loan?
This is a short term finance solution that helps you buy a new property today and sell your existing one later. Essentially ‘bridging the gap.’
Rather than forcing you to sell first and then buy, a bridging loan allows you to secure your next property before your current property has been sold. Once your current property is sold, the sale proceeds are used to reduce the debt, leaving you with the ongoing lon required for the new property.
How does Bridging Finance Work?
Most lenders calculate two figures during a bridging loan application.
Peak Debt
This represents the total amount owed during the bridging period. It typically includes:
The balance of the existing mortgage
The purchase price of the new property
Associated buying costs such as stamp duty and legal fees
End Debt
This is the expected loan balance after the current property is sold and the sale proceeds have been applied
The lender’s primary focus is usually whether the borrower can comfortably manage the End Debt rather than the Peak End
Different Ways to Bridge
Bridging is not limited to one model fits all, depending on your situation, there are various ways to tackle bridging
Upsize or Downsize
Bridging allows you the opportunity to upsize or downsize depending on what you need
Renovate or Invest
Unlock equity for non-structural renovations can increase your value for investment
Separation or Retirement
In the event that you need time to figure out your next move, the flexibility is there
Benefits of Bridging Finance
Gives you more time to assess the offers you have been presented with. Allowing you to maximise on your sale, while also putting in an offer for your purchase with a peace of mind.
You only have to move once, instead of incurring rental expenses and storage fees for your belongings
Most lenders opt for interest-only payments during this time, this helps unlock short-term cashflow
Opportunity to access equity for non-structural renovations to increase value before sale.
Risks for Bridging Finance
In the event that it takes longer than expected to sell your property you may end up financially burdened servicing two loans at once
Property prices play a big role in this scenario, in a market downturn, low valuations could cost you more.
You often need to show banks that you have more than 12-months worth of interest in cash in order for them to approve your loan. This is due to the financial risk associated with the loan.
Is this something you should consider?
Historically, bridging finance attracted significantly higher interest rates. While this can still be true in some circumstances, many mainstream lenders now price bridging facilities much closer to standard home loan rates.
As always the cheapest option is not necessarily the best option. The right solution depends on the borrowers objectives, timeline and risk tolerance. Property decisions are often driven by timing. Unfortunately property markets rarely operate on our preferred schedule.
Bridging finance exists because life does not always fit neatly into settlement dates. For borrowers facing a property transition, it may be worth exploring whether bridging finance could provide the flexibility needed to make a good decision rather than a rushed one.