What happens if find your perfect home when starting to look for a new house and you are yet to put your current home on the market? Or you have actually signed a contract on your next property and are yet to get an offer on your current!! Like many people, you could probably panic however if there’s sufficient equity in your current property, you have the option to use Bridging finance to mortgage the new property and potentially avoid selling you current house at a discount due to a rushed sale.

What is Bridge Financing?

Ability to use Bridging finance is based on the available equity in the home you are selling. The current home together with the proposed property is used as collateral by the bridging loan to settle on the new home before the current home is sold.

Bridging Finance is a short-term, high interest loan that “bridges” the gap between the purchase of a new home and the sale of a current or existing home, allowing a seller to purchase a new property before selling an existing property. The Bridging loans is secured by both properties, one being purchased and the one already held.

Equity is determined by taking the sale price and deducting the debts you currently have on the home – the mortgage balance including any redraw available. The net total is the basis for your bridging loan. Lenders do not allow the bridging loan amount to exceed 80% (LVR) of the combined value of the 2 properties as this loan product does not qualify for lenders mortgage insurance (LMI) cover.

Usually, the interest rate for this type of loan is much higher (1 to 3% above rates quoted on lenders base product), and there’s also at times an administration fee tacked on. Another important point to remember is, bridging loan are on interest only basis. Some lenders will allow the interest to accumulate within the loan and other expect regular repayments. If you let the interest accumulate, on selling your existing property, you will have access to reduced proceeds of sale as a larger bridging loan balance would have had to be paid out.

Most, if not all bridging loans are structured to completely pay off the existing mortgage at the bridge loan’s settlement, while other variations of the loan may add the new debt as a secondary loan. Bridge loans usually come with maximum 6 – 12-month term and the lenders expect that the existing property to be sold and the associated debt paid out before this period expires.