Compare bridging loan interest rates

A bridging loan gives you the money you need to buy a new home before you’ve sold your existing property. When buying and selling real estate, it’s not always possible for the stars to align and the settlement dates to match up, which is when you might need bridging finance to plug your funding gap.

The loan is usually short-term up to a maximum of 12 months and many loans will not require you to make repayments until the sale of your old property is complete. However, you do have the option of making payments on the bridging finance to reduce your interest bill at the end.

Bridging finance can usually be secured quite quickly so you don’t have to miss out on buying that dream home.

It can take a few days up to a few weeks for your bridging loan application to be approved. Often, you’ll need to have a valuation carried out on your existing home as well as the one you wish to purchase and that can take some time to organise.

The process can be quicker if you are using your existing lender to supply the bridging finance.

Some non-bank lenders offer pre-approval for bridging finance within an hour but as always, you need to read the fine print.

A typical loan term is no longer than 12 months.

Bridging loans can be useful but can also be an expensive way to borrow money.

Depending on the structure of your loan, you may not need to make any loan repayments during the bridging period and the interest is capitalised. The interest will be calculated daily, charged monthly and added to the amount outstanding on your loan. That means you could be paying interest on interest.

People can run into trouble if they fail to sell their home within the loan term – up to 12 months – or if the property value falls during the bridging period.

You don’t want to be pressured into selling for hundreds of thousands of dollars less simply because you’re running out of time. Some loans will have penalties and/or higher interest rates if you don’t sell in time and the lender could step in and sell your property to settle the loan. You’ll need to check the default policy.

In addition to application fees and charges associated with setting up the bridging loan, you may be required to provide a valuation for your existing property and the one you are purchasing.

If you happen to be on a fixed rate home loan and your existing lender doesn’t provide bridging finance, you may need to refinance with a new lender, which could trigger hefty break fees.

Interest rates for bridging loans are much higher than a regular mortgage at around 4-5 per cent, though some are as high as 6 per cent.

A cheaper alternative to bridging finance is a deposit bond, a bit like an IOU for the deposit on the new property instead of stumping up the full lump sum at the outset.

The bond works like an insurance policy to guarantee the vendor that the deposit will be paid in full at the time of settlement. In this case, you pay a one-off deposit bond fee – a percentage of the purchase price. If anything goes wrong, you lose the fee and the vendor still gets paid the full deposit.

Other alternatives include seeking a longer settlement on your new purchase to allow you time to sell your current home, or less common, having a clause added to your purchase contract that says “subject to sale” which means that if you don’t sell your old home, you don’t proceed with your purchase.

Bridging finance is a short-term loan of up to 12 months to “bridge” the financial gap between buying a new home and receiving the funds from selling your old one.

The loan amount is calculated on the available equity in your current home and most of the bigger lenders recommend you have at least 50 per cent equity – that means that what you owe is no more than half the value of the home.

The bridging loan is usually made up of the amount owing on your current mortgage plus the purchase price of your new property. This is known as your peak debt. For example, if you owe $400,000 on your current loan and purchase a property for $1 million, your peak debt is $1.4 million.

Once your property sells, the sale price less any upfront costs such as stamp duty, agent’s fees and legal fees is subtracted from your peak debt to leave you with your end debt. So if you sold your property for $700,000, and had associated costs of $50,000, your end debt would be $1.4 million minus $650,000, or $750,000.

Your end debt is what your new loan will be worth and it will revert to a regular mortgage.

If you don't hold enough equity in your existing home and your loan to value ratio is above 80 per cent, you may be required to take out Lenders Mortgage Insurance (LMI). 

How you make payments during the bridging period depends on the structure of your loan. You might make payments only on your current loan while interest accumulates on your bridging loan and you only pay that back once you sell. In this scenario, because you’re not making payments on the bridging loan, the interest costs can accumulate quickly.

Or it could be that you pay interest only on the bridging loan while still paying your current home loan, leaving you to fund two loans at once.

Another thing to keep in mind is while you can usually make extra repayments on your bridging loan, you generally have no access to a redraw facility during the loan period.

Usually your current lender is best placed to offer bridging finance. But if your existing lender doesn’t offer it, you may need to switch and they may insist on taking on your existing loan. If you’re on a fixed rate this could prove costly.

There are two types of bridging loans:

1. Closed bridging loans: These loans are used when you have a buyer for your existing property but the settlement dates don’t match up and you won’t receive the funds from your sale in time to pay for your new home. A closed bridging loan covers a set period of time. These can be cheaper than open bridging loans because they are considered less risky.
2. Open bridging loans: These don’t have an agreed settlement date but are open for up to 12 months. These suit someone who has purchased a new property but hasn’t yet put their existing property on the market or found a buyer yet. If you don’t sell within the term of the loan, penalties apply.

Many banks offer bridging loans but some only provide them to existing customers. Credit unions also offer bridging loans to their members while some non-bank lenders offer bridging loans that might look appealing with offers such as the first few months’ interest-free but the interest rate and application fee can be higher than if you went with a traditional lender. Make sure you always check the comparison rates which take into account fees and charges, as well as the product disclosure statement for penalty and default clauses.

Buying a new home is likely the biggest purchase you’ll ever make. Buying and selling around the same time can be one of the most stressful times of your life. And having to negotiate the complexities of bridging finance on top of that can add to the load. A mortgage broker can take the headache out of finding the right bridging loan for your personal financial situation at a competitive interest rate.