Are you thinking of selling your current home and purchasing one that will suit you better? If that is the case but the shortage of finances still poses a problem in buying your dream home—why not get a bridging loan? 

But how does a bridging loan work in Australia, and what exactly does it entail? Read on to find out.

What is a Bridging Loan in Australia?

A bridging loan (or bridging finance) is a short-term loan you can take out to finance the purchase of a new property while you’re selling your existing one.

The finances you get from a bridging loan can also be used for building a new property.

How does a Bridging Loan Work in Australia?

A bridging loan is an interest-only type of loan that will bring balance to your finances during the “bridging” period when your current property is on sale, and you plan to purchase a new one. 

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The process of being pre-approved for a bridging loan in Australia depends on the lender; it can take anywhere from 5 to 21 days. One of the conditions of getting approved for a bridging loan is proof you have enough income or finances to repay the interest costs till your loan is closed.

Other factors that may determine your eligibility for a bridging loan are:

Upon getting approved for a bridging loan and taking it out, it’s up to the lender to handle the mortgage for your current real estate and the finances for the property you have chosen to buy. 

  • The equity of your existing property
  • Will there be an End Debt, and the maximum amount of it
  • Proof of sale of the property you’ve put up for sale.

Note: Credit score is usually not factored in when you are applying for a bridging loan, although having a good credit rating won’t hurt.

How Do You Pay Off a Bridging Loan?

Some terms you may hear often when taking out a bridging loan are Peak Debt and End Debt:

  • Peak Debt – the total amount you have borrowed from the lender. It includes the sum of the balance loan on your existing property, the price of your new home, and lender and legal fees.
  • End Debt – money you’re required to pay back once your first property is sold and its selling price is taken away from the Peak Debt. From that point onward, End Debt is usually repaid as a standard mortgage product.

Note: Even with monthly repayments, mortgages are still hard to pay off. Property debt account for over half of household debt in the country, so it will take off some careful budget planning to cover the mortgage repaymnets.

Types of Bridging Loans in Australia

There are two types of bridging loans Australian lenders usually offer:

  • Closed bridging loan – a loan you take out when you’ve already found a buyer for your current property. It is usually taken out when you have to pay for your new home before receiving the money from selling your old one.
  • Open bridging loan – a loan you take out when you still haven’t found a buyer for your current home, but want to purchase a new one. This type of bridging loan can have a maximum pay-out period of 12 months and if you haven’t sold your home after the agreed term, you will have to pay fees.

Pros and Cons of Bridging Loans

Before you take a bridging loan, you should take into consideration all advantages and disadvantages of this kind of financial help. 

Some of the key benefits for the homeowners include:

  • Not paying for two full home loans – Taking out a bridging loan will save you from taking an additional full home loan when you already have a property that you can sell and allow you to use the finances to pay a certain amount for the new house.

  • Buying a new property before selling your old one –A bridging loan will help you secure the purchase of your new home before finalising your current house’s sale. Plus, there is no need to make extra costs for renting a place to live once you sell your home.

  • No double repayments – If you take out a bridging loan with interest capitalisation, you won’t need to pay the repayments for both properties till you sell your current property.

  • You can borrow up to 100% of the new home price, which considering rising prices of houses in Australia, is a very big plus.

On the other hand, some cons of taking a bridging loan are:

  • Interest rates are usually higher than those on standard term loans, even if you have figured out a way to save on these monthly expenses,
  • The bridging loan must be paid off in the contract period even if you haven’t sold your home. Additionally, the more time it takes for the old property to sell, the more interest you have to pay.
  • The unpredictable price drops in the real estate market can lead to you selling your home for less money than originally planned.

Bottom Line

If the pros of taking out a bridging loan in Australia have outweighed the cons, congratulations—you’re on the way to getting your dream home! If you have any other doubts about how does a bridging loan work in Australia, you can always go back to our guide or ask your lender for more information.

What happens when you can’t pay off your debt? Read more about this here.

It is also a good idea to consult a financial expert who will explain all the conditions you have to meet in order to get approved for a bridging loan.

1. Do you pay back a bridging loan monthly?

Yes, you will be charged monthly for your bridging loan. Because a bridging loan is considered an interest-only loan, you will have to pay the interest that is calculated on a daily basis but billed monthly. 

2. What is the interest rate on a bridging loan in Australia?

Interest rates for short term bridging loans depend on the lender. All in all, the bridging finance rates for interest usually range from 4% to 6%.

3. Do you need a deposit for a bridging loan?

If you want to know how does a bridging loan work in Australia when it comes to a deposit, it all depends on your chosen lender. In some cases, you will need a minimum of 20% of the total amount you are borrowing as a deposit for purchasing your new property.