Bridging Loans: Rates, Expert Guide & Practical Tips
- Learn how bridging loans work with tips from an experienced expert
- Compare bridging loan rates from 25 providers
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What is a bridging loan?
A bridging loan is a short-term home loan designed to help borrowers purchase a new home while they wait for their existing property to sell. The loan ‘bridges’ the finance gap between buying and selling.
“With a bridging loan, you’re basically buying a new property by borrowing against the equity in your current property to facilitate the purchase,” explains Money.com.au’s home loans expert, Mansour Soltani.
Most bridging loans are only designed to be held for a maximum of 6-12 months. But even within this short period, bridging loans can be an expensive form of finance, with higher rates than standard loans typically applying.
Some lenders charge in excess of 10% p.a., Money.com.au’s analysis found.
If you get a bridging loan, the amount borrowed will be on top of your existing mortgage, so be prepared for high repayments during the bridging loan term. Most lenders offer options to minimise the repayments burden during this time (more on that to come).
How do bridging loans work?
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Requires a full credit application
You apply for a new loan either with your current lender or a new provider to purchase a new property. This can either be a full loan application based on a property you have found, or a pre-approval application allowing you to go house hunting with a budget in mind.
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You use the equity in your current property
A bridging loan typically involves releasing equity in your current home to use as security for borrowing the deposit and purchase amount for a new property.
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Old loan + new loan = 'peak debt'
You will then typically be holding two loans until you sell your current home: your existing loan if you have one, plus the new bridging loan. This combination of loans is known as your ‘peak debt’.
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Limited term duration
You typically have up to 6-12 months to sell your current home. If you can't sell your home during this time, you can apply for an extension, or your lender may intervene to ensure the property is sold as soon as possible.
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Options to lower repayments
During the bridging loan term, you usually have the option of making interest-only repayments so your repayments are lower. Some bridging loans don’t require you to pay anything until the end of the term. Instead, you repay the full amount, plus interest (which would have been compounding during the bridging loan term) using the proceeds of the property sale.
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Bridging loan repaid when your home is sold
When you sell your property, the funds are used to pay out your bridging loan. The outstanding finance becomes your ‘ongoing loan’ or ‘end debt’. Repayments usually revert to principal and interest at this stage.
Bridging loan example
View real-life case study
Our home loans expert, Mansour, has helped numerous borrowers secure a bridging loan to fund a new property. He offers the following example based on a recent client:
“This client had a property worth $2.5m, but only owed about $300k on it. He wanted to cash out $1.2m to place as a deposit on a new property. But he wanted to take his time to sell the home he's already got.”
Mansour said the client took out a bridging loan with ANZ – one of the few lenders in Australia that does not charge a higher rate on its bridging loans compared to the standard variable rate.
The client was able to release equity in the existing property to use as a deposit to secure bridging finance for the new property, before using the sale funds to reduce the overall debt.
“In that scenario, when banks are assessing loans, the big thing they ask is ‘what's the end debt?’ Because that is the amount the borrower will need to be able to service over the long term.”
Bridging loan providers and rates
The table below shows a selection of the lenders in Australia offering bridging home loans, based on Money.com.au’s analysis.The table is based on owner-occupier loans and is sorted by lowest interest rate, then lowest comparison rate.
| Interest rate | Comparison rate | Maximum term | Maximum LVR | |
|---|---|---|---|---|
Newcastle Permanent | 6.39% p.a. (fixed) | 6.43%p.a. | 12 months | Not disclosed |
Border Bank | 6.84% p.a. (variable, interest-only) | 6.25% p.a. | Not disclosed | 80% |
Police Bank | 6.84% p.a. (variable, interest only) | 6.25% p.a. | 12 months | 80% |
Bank of Heritage Isle | 6.84% p.a. (variable, interest-only) | 6.33% p.a. | 12 months | 80% |
Yard | 6.89% p.a. (variable) | 7.31% p.a. | 6-12 months | 80% (of combined property value) |
Commbank | 7.18% p.a. (standard variable loan with interest-only repayments) | 7.25%p.a. | Not disclosed | 80% |
Police Credit Union | 7.24% p.a. (variable) | 7.30% p.a. | 12 months | 90% |
RAMS | 7.44% p.a. (variable Essential Home Loan with interest-only repayments) | 7.51% p.a. | 9 months (extension of 3 months may be possible) | 70% |
Bank Australia | 7.65% p.a. (variable) | 7.70% p.a. | 12 months | 75% |
Australian Mutual Bank | 7.70% p.a. (variable) | 7.78 % p.a. | 12 months | 85% |
ANZ | 7.79% p.a (standard variable loan with interest-only repayments) | 7.49% p.a. | 12 months | 80% of value of new property |
LCU | 7.79% p.a. (fixed) | 8.43% p.a. | 12 months | 95% |
Bridgit | 8.49% p.a. (variable) | 8.64% p.a (or 8.61% p.a if sale is already agreed on existing property) | 6 months | 75% |
Community First Bank | 8.79% p.a. (standard variable rate, interest-only) | 8.65% p.a. | 12 months | 95% |
BankSA | 9.04% p.a. (variable) | 9.18% p.a | 12 months | 70% |
Bank of Melbourne | 9.04% p.a. (variable) | 9.18% p.a | 12 months | 70% |
St.George Bank | 9.04% p.a. (variable) | 9.18% p.a | 12 months | 70% |
People’s Choice | 9.06%p.a. (variable) | 8.64%p.a. | 12 months | 85% |
P&N bank | 9.27% p.a. (variable) | 9.28% p.a. | 6-12 months | |
Heritage Bank | 9.29% p.a. (variable) | 9.39% p.a. | 6 months | 72% |
G&C Mutual Bank | 9.49% p.a. (variable) | 9.52%p.a. | 12 months | 75% (or 50% if loan will be fully repaid after sale of property) |
BCU Bank | 9.51% p.a. (variable) | 9.51% p.a. | 6 or 12 months | 80% |
Arab Bank Australia | 11.45% p.a. (variable, interest-only) | 11.52% p.a. | 6 months | Not disclosed |
HSBC | Available when you enquire | Available when you enquire | 6 months | 90% of the LVR of the property to be sold |
Westpac | Available when you enquire | Available when you enquire | 12 months | 70% |
Bridging loan pros and cons
Pros of bridging loans
- Convenient short-term option if you find a property to buy before you have sold your current one.
- Can save you money by meaning you don’t need to rent a property or pay storage fees while you find a new home (after selling your existing one)
- Flexible options to keep repayments manageable while you have a high ‘peak debt’ (e.g. interest-only payments).
- Maximum terms of up to 12 months with most lenders gives you a decent window of time to sell your home.
- You generally have the flexibility to close out the loan quickly if you sell your home faster than expected (saving you interest).
Cons of bridging loans
- Higher interest rates compared to standard loans, although some lenders (e.g. ANZ and RAMS) offer the same rates as standard loans.
- You will have a high level of debt during the bridging loan term, with high interest costs building up.
- If you can’t sell your home within the bridging loan term, some lenders technically count this as a ‘default’ and may need to step in to ensure the property is sold.
- If your existing property sells for less than expected and it's not enough to pay off the bridging loan (including interest) you will have higher ongoing debt and repayments than you may have budgeted for.
“Always check with your lender to make sure they're going to give you adequate time for you to sell your home. Some lenders might give you a really good rate, but then say ‘we want our money back in three or six months’. Even if you have 12 months, don't wait till the nine month mark to start selling your home.”
Mansour Soltani, Money.com.au's home loan expert
Bridging loans vs standard home loan
There are a few key differences between low doc home loans and regular home loans that are important to understand.
| Bridging loan | Standard home loan | |
|---|---|---|
Purpose | Purchase a new home secured by equity in an existing property you intend to sell within 12 months. | Purchase a new home supported with either a deposit or equity from another property. |
Maximum loan-to-value ratio (LVR) allowed | Usually up to 85% but varies by lender. | Usually 95% with lender’s mortgage insurance. |
Interest rates | Depends on the application and lender but generally higher than standard loans. | Lower than bridging loan rates but vary based on the LVR and other factors. |
Repayments | Usually interest-only. Some lenders don’t even require the borrower to pay off the interest until they have sold their original property. | Option of interest-only for a set period but most borrowers pay off the principal and interest throughout the loan term. |
Availability | Not all lenders offer bridging loans, but some niche lenders specialise in bridging loans. | Wider selection of options and rates. |
Eligibility requirements for a bridging loan
Here are some of the main requirements for lenders for when assessing eligibility for bridging finance:
- High level of equity in your current home.
- High likelihood that your current property will be sold during the bridging loan term (Mansour says some lenders won’t lend against properties in rural areas for this reason).
- Some lenders (e.g. Commbank) only offer bridging finance to customers with an existing home loan.
- You will need to demonstrate you have capacity to at least cover interest-only payments on your peak debt (current mortgage plus bridging finance) until your current home is sold.
- Some lenders may require you to have an amount equivalent to how much interest you will be charged in cash savings when you apply.
Mansour says there are some specialist private lenders with more lenient eligibility criteria and faster approvals, but there are risks to using these lenders.
Be wary of lenders promising easy approval and fast finance
“These guys will get you your money and they'll get it real quick, but they're going to slug you with big fees and high rates for the privilege. You may have to hand over about 2% or 3% of the loan value upfront as a fee. But these providers lend that amount to you and you repay it to them as part of the loan, with plenty of interest on top.”
Mansour Soltani, Money.com.au's home loan expert
Alternatives to bridging loans
Here are some potential alternatives to using bridging finance. Before deciding one way or another, ensure you have consulted with relevant experts (mortgage broker, financial advisor, solicitor) so you know what you’re signing up for.
1. Take out a second standard home loan
If you can afford the repayments on two loans, you could apply for a second, separate home loan to finance the purchase of your new home. You would generally then use the sale funds from your existing home to pay out your original loan and any leftover money could go towards lowering the balance of the new loan.
This is similar in theory to how a bridging loan works, but it may be more difficult to get approval and you likely won’t have the same flexibility to lower your repayments while you have two loans to repay.
2. Buy a property and ask for a longer settlement
Another option is to ask the seller of your new home to agree to a longer settlement period (e.g. 90 days instead of 30), giving you more time to sell your current property. This could allow you to sell your current property before the sale of the new one is finalised and money needs to change hands.
You could also ask (with the help of your solicitor) to make the contract for you to purchase your new home subject to you selling your current property.
Not all sellers will agree to this, however. Even if they do, there is still no guarantee you will be able to sell your property by the time the settlement date on the new property arrives.
3. Deposit bond
If you just need cash for a deposit to secure your new property (usually 10% of the value), you could consider a deposit bond. This is a product offered by some lenders and insurance companies and is a promise to the property seller that the deposit will be paid in full by the due date. You, as the buyer, pay a non-refundable fee usually ranging from 1-2% of the amount, to the issuer of the deposit bond.
If you use a deposit bond, this will only cover the initial deposit required to secure the home. You will still need to cover the remainder of the sale price when the sale settles. For this reason, deposit bond are generally used if you have agreed a sale on your current property and are waiting on the sale funds to come through – but you have found a new property to buy in the meantime.
4. Wait until you’ve sold your current home
If you don’t want to take out additional finance to buy a new home, you could always wait until you have sold your current property. This means you will have a clear idea of the budget for the new property, and depending on the situation (e.g. if you are downsizing), you may not need finance at all.
While you find your new property, many borrowers keep the sale funds from the old home in a high interest savings account, or even a term deposit if you know you won’t need to access the money for a certain amount of time.
The downside is you may need to rent for a period of time after you have sold your old home and are looking for a new one. If property values are rising quickly, this strategy could also mean you end up needing to pay more than you would have had you purchased the new property first.
Bridging loan FAQ
What happens if I can’t sell my home within the bridging loan term?
If your home hasn’t sold within the bridging finance term, you could ask the lender for an extension to give you more time. If this isn’t granted you may be required by the lender to sell the property to pay out the bridging finance, even if the sale price is significantly lower than what you wanted initially.
If that happens, your ongoing debt (the loan after the bridging amount is cleared) will be higher than what would have been planned for initially.
For this reason, a bridging loan may not be a good idea unless you are very confident that your existing property can be sold within the bridging loan term.
How much deposit do I need for a bridging loan?
You generally don’t need to contribute a cash deposit when taking out bridging finance, according to Australian lender Bankwest. You typically use equity in your existing property instead of a cash deposit to secure the finance.
What happens to my bridging loan once I’ve sold my property?
When you sell your old property, the sale funds are used to clear the bridging loan. Once that happens, you are left with a single standard home loan. Your repayments usually switch to principal and interest at this stage, having potentially been interest-only during the bridging loan term.
At the end of the bridging loan term, some borrowers use this as an opportunity to assess their loan and lender again and refinance the home loan if necessary.
How much can I borrow with a bridging loan?
How much you can borrow with a bridging loan will be determined by your loan-to-value ratio, plus your overall financial position and how much you can afford to make in repayments during the bridging loan term.
Depending on the lender, the the maximum loan-to-value ratio allowed could be based on:
- The bridging finance amount as a percentage of the value of the new home you’re buying.
- Your peak (total) home loan debt as a percentage of the combined value of your new and current property.
How do I decide which bridging loan is best?
Because a bridging loan is a more complicated arrangement than a standard home loan, it’s generally a good idea to consult with an expert like a mortgage broker when deciding which loan to choose.
While for some lenders being an existing customer is a prerequisite, Mansour says it’s often worth looking beyond your current bank.
“Check the entire market and think about what's going to be the best option for my specific situation? Because a lot of the time, it's not the lender that you're with currently.”
To get you started, here are some general factors you may wish to consider when deciding on the best bridging home loan:
- What’s the interest rate?
- Is the interest rate fixed or variable?
- What home loan fees will you need to pay?
- What’s the maximum amount you can borrow?
- What’s the maximum loan-to-value ratio allowed?
- What’s the maximum term (how long you will have to sell your current home)?
- What are the repayment options (e.g. interest-only or all repayments deferred until your current home is sold)?
- What features are on offer that could save you money (e.g. offset account, extra repayments allowed with redraw)?
Home Loans guides and resources
What's the next step on your property journey? Our home loan guides will help you navigate the road ahead, whether you're buying, building or looking to save on an existing loan.
Written by
Editor
Sean Callery
Reviewed by
Home Loans Expert
Mansour Soltani
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