Bridging Loans Explained: How to Manage the Gap Between Buying a New Property and Selling Your Old One

It often becomes the case that after some time, our current home no longer serves our needs. Maybe the family is expanding, or the kids are moving out. You may have even found your dream home, and it’s time to upgrade.

But how do you make the transition work financially? Bridging loans offer a solution to this common dilemma, providing a temporary financial bridge between your new purchase and the sale of your old home.

What is a Bridging Loan?

A bridging loan is a short-term financing option designed to help buyers cover the purchase of a new property while waiting to sell their current home. It essentially bridges the financial gap between the sale and purchase transactions.

These loans are typically interest-only, meaning you only pay the interest during the loan term, with the principal due at the end of the term, usually once your old home is sold. Bridging loans are typically short-term, usually up to 12 months. This aligns with the expected time frame for selling your existing property.

There are Two Types of Bridging Loans:

Closed Bridging Loan:

This is used when you have already agreed on the sale of your current property, and the sale is in progress but not yet completed. The end date is known, which gives the lender confidence, leading to more favourable terms.

Open Bridging Loan:

This is applicable when you haven’t yet found a buyer for your existing property. It’s less certain because there's no definite end date, making it riskier for the lender and generally more expensive for you.

Benefits of Bridging Loans

In a competitive market, the ability to quickly secure funding can make a massive difference to securing your dream home. A bridging loan can help secure the funding quickly, or even potentially maximise your profit by selling your existing property under favourable market conditions.

Immediate Funding: Bridging loans provide quick access to funds, allowing you to secure a new property without the need to first sell your existing one.
Flexibility in Market Timing: They offer the flexibility to wait for the best selling price on your current home, rather than rushing into a sale at a potentially lower price.
Continuity of Residence: They help avoid the need for temporary rental housing, providing a seamless transition from one home to another.
Leveraging Opportunities: Quick access to funds means you can take advantage of buying opportunities that might otherwise require immediate cash, such as auction purchases.
Streamlining Transactions: By aligning your buying and selling timelines, bridging loans simplify the logistics and reduce the stress involved in moving.

Process of Applying for a Bridging Loan

The application process for a bridging loan typically involves the following steps:

Assessment of Needs: Determine the amount needed to bridge the gap between buying a new home and selling your old one.
Application: Submit an application to a lender who offers bridging finance, providing details about both your current home and the property you intend to purchase.
Valuation: The lender will likely require a valuation of both properties to assess the risk and determine the loan amount.
Approval and Funding: If approved, the funds are usually made available quickly to facilitate the purchase of your new property.

Scenario:

Imagine you've found a new house you want to purchase for $500,000, but your current home, valued at $450,000, hasn't sold yet.

Loan Amount: You need $500,000 to purchase the new house.
Existing Mortgage: You still owe $200,000 on your current home.

Total Finance Required: The total amount you need to borrow temporarily would be the sum needed for the new house plus what you owe on the old one, minus the expected sales price of your current home.

Calculation:

Total Bridging Loan=(New Home Price+Outstanding Mortgage)−Expected Sales Price of Old Home
Total Bridging Loan=($500,000+$200,000)−$450,000=$250,000

Interest Over 6 Months: Since it’s a short-term loan, we calculate simple interest to estimate costs. Assuming it takes 6 months to sell your home (a 7% interest rate has been calculated here only for use in this example). NOTE- interest rates may be higher for a Bridging facility.
Interest=Principal×Interest Rate×Time
250,000×7%×0.5 (half a year)=$8,750

Total Amount Due at the End of Term: $258, 750

Repayment: Once your current home is sold for $450,000, you use part of that to repay the bridging loan.

Remaining Funds from Sale: After paying off the bridging loan, you are left with: Funds Remaining=Sale Price−Total Due= $450,000−$258,750 = $191,250

These remaining funds can then be used to repay any outstanding mortgage you had on your old home, cover moving costs, or invest back into your new property.

Important Considerations

→ Cost: Bridging loans are generally more expensive than traditional mortgages in terms of interest rates and fees.

→ Timing: It’s crucial to have a realistic plan for selling your existing property; unexpected delays could increase costs significantly.

→ Exit Strategy: Ensure you have a clear exit strategy for repaying the loan. This is typically from the proceeds of your home sale.

At IDEAL Financial Group, our team of experienced mortgage brokers specialises in navigating the complexities of bridging loans.

We can assess your financial situation and help determine if a bridging loan is the right option for you.

We'll guide you through the application process, ensuring you understand all aspects of the loan, from terms to repayment plans. Whether you're looking to bridge the gap between buying and selling properties or need a short-term solution to secure your next home, we provide expert advice and support to make the transition as smooth and stress-free as possible.

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