Bridging loan alternatives
What is a bridging loan?
A bridging loan, or bridging finance, is a short-term loan that helps ‘bridge’ the gap between the sale of your existing home and the purchase of a new one. This loan allows homebuyers to move into their new home while selling their old one.
How do bridging loans work?
The structure of bridging finance varies from lender to lender. The exact loan terms and features depend on the type of bridging loan you get; a closed bridging loan or open bridging loan.
When you get a bridging loan, your lender takes over the mortgage on your new and existing properties. Your bridging loan will be a combination of your old and new home’s mortgage. The price of your new home plus fees and the remaining balance of your existing home loan is the ‘peak debt’.
Once you’ve sold your old home, the proceeds from the sale will be used to reduce your peak debt. What’s left over is called the ‘end debt’ and will be paid like your standard home loan.
Are there good alternatives to a bridging loan?
The short answer: it depends on your financial situation. Bridging loans are usually the simplest and most convenient choice. If you’re unsure if a bridging loan is right for you, here are some alternatives that may be a better fit.
Get an additional home loan
Instead of a bridging loan, you can take out another home loan. The new mortgage will be used to finance your new home purchase. With this option, you will be paying for two home loans at the same time.
If you aren’t in the process of selling your old home, this might be a good alternative. However, finding a good second home loan and maintaining two mortgages may be challenging.
Alter the purchase contract
If possible, you could add a ‘subject to sale’ clause on the buyer’s contract for your new home. This makes the contract on your new home conditional until you’ve sold your existing home. This option runs the risk of you losing out on your new property.
Simultaneous settlement
A simultaneous settlement happens when you finalise the sale of your property and settle the purchase of your new one at the same time. This requires serious precision and planning as everything needs to go according to plan.
What are the pros and cons of bridging loans?
Bridging loans have their fair share of advantages and disadvantages. It’s important to understand all of them to know if a bridging loan is right for you.
Pros of a bridging loan
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With a bridging loan, you can buy your dream home right away. No need to wait for your current home to sell.
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You don’t have to sell your home right away. You can wait until you get the best offer possible without the stress of a separate property purchase.
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Avoid renting costs and the hassle of moving your things into storage twice.
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You typically only have to manage one home loan repayment in the interim. You don’t have to manage two home loans at once.
Cons of a bridging loan
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If your property sells for less than expected, you could also be left with a larger ongoing loan amount.
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Bridging finance may require two property valuations, which could mean two valuation fees.
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Bridging loans typically include additional associated costs like bridging loan fees.
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Termination fees may apply especially if you’re switching lenders.
If you want to learn more about bridging loans, get in touch with our friendly lending specialists! Give us a call at 13 10 90. We’re more than happy to talk to you about your bridging finance needs.
Find out in under 2 minutes if you qualify for one of our low rate home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
