What is a Bridging Loan?
- Why might I need Bridging finance?
- Advantage of Bridging Loan
- How do Bridging Loan work?
- Case Study
- FAQs
Bridging loan is designed to provide short-term financing to help home buyers bridge the gap between selling their existing property and buying a new one. There are two types of bridging loans: no end debt and end debt bridging loans.
Why might I need Bridging finance?
Here is a list of common reasons why home buyers take out a bridging home loan in Australia:
- To purchase a new property before selling your current one
- Taking advantage of a favourable property market
- Versatility of being able to complete home renovations before listing
- Giving you the confidence to look for a new home without selling your existing property
- Skip the trouble of thinking about where to live during the time period of searching and buying your new home
Ultimately, you should consider your individual circumstances and financial goals before taking out a bridging home loan.
Advantage of Bridging Loan
1. Save Money
The cost of temporary living arrangements, including moving and storage of belongings in the period between selling an existing property and purchasing a new one can be considerable.
2. Sidestep Temporary Accommodation
Temporary accommodation can be both expensive and unreliable and a step most Australians would prefer to avoid.
3. Secure your dream home
A bridging loan lets you move forward fast. In the Australian market, this is key to you not missing out on your dream home.
How do Bridging Loan work?
No end debt bridging loan
A no end debt bridging loan, as the name suggests, has no set repayment date, and you’ll pay the interest charges and the loan balance in full when the loan matures. This option is great if you are looking to downsize your home because you can sell your property quickly and use the money to pay back the loan when it ends.
End debt bridging loan
If you’re upsizing your home, an end debt bridging loan may be a practical option. This loan is split into two parts: a short-term loan that covers the costs of selling the existing property, and a long-term loan for buying a new property. When your property is sold, the money is used to repay the short-term loan component, leaving the borrower with a long-term loan for the new property. This option is good for borrowers who are uncertain about when their property will sell, giving them more security and confidence.
Before taking out a bridging home loan, it’s important to understand the concept of ‘peak debt’ and ‘end debt’. Peak debt is the highest level of debt a borrower will incur before they sell their existing property and repay the loan. End debt, on the other hand, is the total amount of debt that remains at the end of the loan term.
Let’s look at a case study below:
A working couple lives in an apartment in Melbourne and they are planning to upsize their home. They happen to come across an ideal house in a location they like but they don’t want to lose out on it, so they apply for a bridging loan while they try to sell their apartment. The existing mortgage balance on the apartment is $250,000 and is then transferred into the bridging loan, which has a maximum term of 12 months. the couple also got approved for a $750,000 loan for their new house, resulting in a total peak debt of $1,000,000
After selling their apartment for $450,000 within seven months, the couple utilized $250,000 to pay off their initial debt, leaving them with $200,000 in proceeds. They used this amount to pay off the peak debt, which resulted in an end debt of $800,000. Following the sale of their property, their home loan transitioned to regular principal and interest payments under a Full Doc Prime home loan product.
At Brighten, we understand that everyone’s financial situation is different. That’s why our bridging home loan product Brighten Connect is designed to provide borrowers with flexibility. During the Bridging Period, the interest budget will be retained and no repayment will be required.
If you’re in need of short-term financing to bridge the gap between buying a new property and selling your existing one, contact Brighten today to learn more about our bridging home loan solutions.
FAQ about Bridging Loans
Why might someone need bridging financee
Here are some common reasons why home buyers take out a bridging loan in Australia.
- Buying a new property before selling their current one.
- Taking advantage of a favourable property market.
- Completing home renovations before listing.
- Not needing to worry about where to live while looking for a new home.
- Potentially borrowing more as they can use the equity in the home they’re selling to finance the new purchase.
What is “peak debt” and “end debt”?
Before taking out a bridging loan, it’s important to understand the concept of ‘peak debt’ and ‘end debt’. Peak debt refers to the highest level of debt-incurred before the sale of an existing property. It includes the loan amount for the new property as well as any outstanding mortgage on the current property. End debt is the total amount of debt that remains at the end of the loan term, after the existing property is sold and the bridging loan is repaid.
How much can I borrow?
It depends on the lender. For Brighten, our bridging loan product – Brighten Connect – offers:
- peak debt of up to $5m for loans up to 70% LVR.
- peak debt of up to $2m for loans up to 80% LVR.
The maximum amount a customer can borrow depends on various factors, such as their income, liabilities and credit history. Brighten’s online borrowing calculator offers an estimate based on your current financial situation, helping you understand how much you could potentially borrow.
What is the loan term for a bridging loan?
It depends on the lender. For Brighten, our bridging loan product – Brighten Connect – offers a 6-12 months bridging period, and a total loan term of up to 30 years.
What is a “no end debt” bridging loan?
A ‘no end debt’ bridging loan could be a good option if you’re downsizing your home. This type of bridging mortgage has no set repayment date and you’ll pay the interest charges and the loan balance in full when the loan matures. When you sell your property, you can use the money to pay back the loan when it ends.
What is a “end debt” bridging loan?
An ‘end debt’ bridging loan could be a good option if you’re upsizing your home. This type of bridging mortgage is split into two parts: a short-term bridging loan that covers the costs of selling the existing property and a long-term loan for buying a new property. When your property is sold, the money is used to repay the short-term bridging loan component, leaving you with a long-term loan for the new property.
How does repayment work for a bridging loan?
It depends on the lender. For Brighten, our bridging loan product – Brighten Connect – follows an Interest Only repayment structure. During the bridging period, the interest budget is retained, so no repayments are required. If there’s no end debt required, the borrower will simply pay off the short-term bridging loan once their existing property is sold. If there’s an end debt involved, then after the existing property is sold and the bridging loan is repaid, the loan will automatically revert to a standard Brighten Full Doc and Alt Doc product with an applicable interest rate — typically at a lower rate.
Are there postcode restrictions on the property I use as security?
For bridging finance, we accept houses, apartments and townhouses as security in category 1 (metro areas, capital cities in each state and major regional centres with large populations) and category 2 (medium-sized regional centres) postcodes.
What do I need to provide as proof of income?
It depends on the lender. For Brighten, if there is no end debt involved, no income documentation is required. If there is end debt involved, the required documents will depend on the end debt loan. Generally, for Full Doc loans we accept two consecutive payslips. For Alt Doc loans we accept one form of income verification, such as: Brighten template accountant’s letter, 6 months of BAS or 3 months of business bank statements. Please refer to the Document Checklist section for more details.
