Bridging the Gap: How Bridging Loans Works

Imagine this: you've finally scored your dream home, but you're still in the process of finding a buyer for your current home.

Not the ideal situation to be tied up in, but what do you do? You need a financial boost to bridge the gap between selling your existing property and acquiring the new one. This is where bridging loans enter the picture.

What is a Bridging Loan?

A bridging loan is a temporary financing solution until a person or business obtains long-term funding or fulfils an existing financial obligation. It enables the borrower to satisfy present financial responsibilities by providing immediate access to cash flow.

Think of it as a line of credit that gives you the funds to purchase your new property while you wait for the sale of your old one to go through. Once you’ve sold your old property, you’ll have up to a year to repay the cost of the bridge.

A warning: bridging loans come with more financial responsibility since you'll have to pay off both simultaneously.

Financial Saviour

There are two primary reasons why a bridging loan might work in your favour:

Interest capitalisation

A capitalized interest is the interest that accrues during the bridging period and is added to the principal at the end of the loan term, just before the loan is paid out. This means that the borrower does not have to make interest payments during the bridging period but will ultimately pay more in total interest over the life of the loan due to the addition of capitalized interest.

Let’s face it, and sometimes our servicing capacity just can’t keep up with the repayments on both properties. Fortunately, a bridging loan with an interest capitalization feature can give you the financial breathing space you need while waiting to sell your current property.

Up to a 100% loan on the new property

There are no upper limits on the amount of money you can borrow through bridge financing, but you’ll be glad to know that you can borrow up to the total price of the property you want to purchase, meeting certain conditions. This is a game-changer for those eyeing a property just out of reach within their current borrowing capacity.

Who Can Get a Bridging Loan?

To be eligible for a bridging loan, you must:

Be over 18 years old

Be an Australian resident
Typically, provide a 20-25% deposit This requirement is partly because the lender’s mortgage insurance doesn’t cover bridging loans. The deposit may be in cash or equity.
Have a steady income and comply with the lender’s affordability criteria
Have enough equity in your property

Should I Get a Bridging Loan?

If you’re in the market for a new home and need short-term finance to bridge the gap between selling and buying, a bridging loan could be a game-changer and a valuable tool for your home purchase and home selling journey.

But before you dive in, it’s essential to consider the timeframe. Bridging loans typically have a repayment period of 12 months, and if you’re not confident you can sell your home within that timeframe, it may not be the best option for you. Time flies, and before you know it, your bank or lender could step in to sell your home.

So, if you’re confident in your ability to sell your property within 12 months and need a financial bridge to make your property dreams a reality, a bridging loan could be the perfect fit for you.