Bridging loan – best solution to buy a new property when the old one hasn’t sold

Bridging loan - best solution to buy a new property when the old one hasn't sold

Sometimes life throws us curveballs, and you might need to buy a new property before you sell your current home or commercial premises.

To help bridge the finance gap, borrowers need a bridging loan, and it’s the perfect solution to help you fund your purchase.

You might still have a mortgage on your existing property. However, you may need to finance the purchase of your new property, which is where bridging loans (whether residential, commercial or investment) become super-handy. In some circumstances (whether it be golden opportunities too hard to resist, or perhaps it’s a lifestyle choice), you buy a property while still holding your existing property. Juggling finances can become tricky, so you need to take out a bridging loan. If you haven’t sold your home and committed yourself to another property purchase and are stressing out a bit, don’t, as bridging finance is a lifesaver.

Also read: Emergency Business Finance – Your Options Explained

What is a bridging loan?

A bridging loan (both commercial & residential) is a short term loan – typically between 6 to 12 months – which will cover the loan repayments on an existing mortgage and any interest payments due, plus other associated costs on the new property purchase. The beauty of a bridging loan is that it takes the pressure off you and allows you not to have a fire sale or quickly sell your existing property. In the current downturn, Sydney property market like we are experiencing now in May 2022; a bridging loan is a lifesaver. Bridging loans give you a bit of breathing space and room to reevaluate your finances and sell your existing property when the time is right.

How does a bridging loan work?

There are many ways to structure your bridging loan, but it will depend on a few variables, such as your home or commercial property equity and the lender or private lender you decide to use.

The best way to structure a bridging loan is to add it to your existing loan, including the new property as security collateral, where you will capitalise your interest payments until the time you sell your current property, usually for a period of 3 to 6 months.

Another way bridging finance works is refinancing your original loan over the first property with a bridging loan using both properties as security over a designated period. The best part about this type of loan is you can just pay the interest and no principal during the loan term. Most borrowers capitalise their interest for the term but you can choose monthly payments if you are able to service the loan monthly. Once you sell your property, you can repay the portion of the bridging loan and start a new loan with a cheaper provider.

What are some of the risks associated with bridging finance?

While bridging loans may seem like a great idea, they don’t come without risks. The main risk is that you will be hit with higher interest fees if you don’t sell your property within the loan period. In volatile real estate markets bridging loan risks are very high if there is a sudden downturn in the property market and you can’t sell. Being exposed like this with a large loan outstanding is super risky, so you have to do your due diligence and get the loan from a lender that you might be able to negotiate with if your financial terrain becomes worse. One other risk is the interest rates with bridging loans. If they are flexible and interest rates go up, your monthly obligations can chance if you are paying monthly and haven’t locked in your interest rate.

If you need a bridging loan and feel that it’s the right path for you, then make sure you understand your rights, the full set of fees (and any exit or early repayment fees), any penalties

About the author

Ulrika Lobo

Ulrika Lobo is the lending specialist at Sparrow Loans and has over ten years of experience in the commercial business loan space. Ulrika co-founded Sparrow Loans to provide Australian SMEs with a faster and easier way to access finance. Ulrika is responsible for managing the lending process from underwriting to execution and settlement and post-settlement support.