Bridging Loans

Understanding bridging finance

Bridging loans provide short-term financing that allows you to purchase a new property before selling your existing one. This type of financing "bridges" the gap between buying and selling, enabling you to take advantage of market opportunities without being constrained by sale timing.

When bridging finance is needed

Bridging loans become necessary in several common property transaction scenarios where timing doesn't align perfectly between purchase and sale contracts.

• Buying your next home before selling current property
• Participating in property auctions requiring unconditional purchase
• Accepting unconditional purchase contracts with tight settlement terms
• Managing settlement timing mismatches between sale and purchase
• Taking advantage of time-sensitive market opportunities

Types of bridging arrangements

Lenders offer different bridging loan structures depending on your specific circumstances and the certainty around your existing property sale.

Closed bridging loans: These arrangements apply when you have a signed contract to sell your existing property with a definite settlement date, providing lenders with greater certainty about loan repayment timing.

• Existing property already under contract with confirmed buyer
• Definite end date based on sale settlement
• Lower interest rates due to reduced lender risk
• More predictable exit strategy and timeline

Open bridging loans: Used when you haven't yet secured a buyer for your existing property, these loans carry higher risk and costs due to the uncertain timeline for repayment.

• No confirmed sale contract on existing property
• Indefinite loan term until property sells
• Higher interest rates reflecting increased risk
• Requires stronger financial position and serviceability

How bridging loans operate

Bridging arrangements typically involve borrowing against both your existing property and the new property you're purchasing, with the expectation that selling your current home will repay the additional borrowing.

• Borrow against equity in both existing and new properties
• Usually structured as interest-only payments initially
• Existing property sale proceeds used to pay down bridging debt
• Remaining loan converts to standard mortgage on new property
• Requires sufficient equity and income to service both loans temporarily

Costs and considerations

Bridging loans involve higher costs than standard home loans due to their short-term nature and the additional risk lenders assume.

• Interest rates typically 1-2% higher than standard variable rates
• Valuation fees required on both properties
• Legal costs for additional loan documentation
• Application and establishment fees for bridging facility
• Potential exit fees when bridging arrangement concludes

Benefits of bridging finance

Despite higher costs, bridging loans provide significant advantages for borrowers who need flexibility in their property transactions.

• Purchase new home without selling existing property first
• Avoid temporary accommodation costs and inconvenience
• Negotiate from stronger position without sale contingencies
• Take advantage of time-sensitive market opportunities
• Potentially achieve better sale price by avoiding rushed sale

Risks and management strategies

Bridging finance involves substantial financial risk that requires careful planning and risk management to avoid potential difficulties.

• Carrying costs on two substantial properties simultaneously
• Market timing risk if property values decline
• Potential for forced sale if unable to service both loans
• Significant financial stress from managing multiple large repayments

Exit strategies and planning

Successful bridging arrangements require clear exit strategies and contingency planning to manage various scenarios that might arise during the bridging period.

• Sell existing property as quickly as possible to minimize costs
• Consider renting existing property if sale market conditions poor
• Refinance both properties into long-term arrangements if sale delayed
• Have contingency plans including potential sale of new property if necessary