Mortgages
6 min read
Bridging finance is a special type of mortgage. It allows you to buy a new home before you sell your current one.
It’s a temporary solution. It’s there to “bridge” the gap between when you buy and sell a property.
Over the years, many home buyers have asked me: “April, can you please just explain, as simply as possible, what bridging finance is. The pros and the cons … and any gotcha’s I need to know about.”
I’ve been a mortgage broker for over nine years. So, in this article I’m going to share my honest opinion about bridging finance, and what you need to know.
That way you can make an informed decision about whether a bridging loan is right for you.
A bridging loan lets you own two properties at the same time (temporarily).
So let’s say you own your own home. Then, you’re driving down the street and you see your dream home: the one you’ve always kept your eye on.
It’s for sale! And there’s an open home this Saturday. You turn up to the open home and fall in love. It has everything you’ve always wanted but, look, there are lots of other people at the open home too. You need to get an offer in quick.
But, then you remember … you haven’t sold your house yet. In fact, it’s not even on the market.
So, how are you going to buy your dream house before you’ve sold your own home?
That’s where a bridging loan comes in. Some lenders will give you a loan so you can buy a new house, even though you haven’t sold your old one.
It doesn’t last forever; it’s only temporary. So, there are pros and cons and fishhooks you need to look out for.
There are a couple of situations where you might use a bridging loan:
There are two types of bridging loans, Closed or Open, so what’s the difference?
A closed bridge is simple. It has a defined end date. You already know when you can pay off the loan.
For example, you’ve found your next home, and you’ve already sold your property.
For example, Linda buys her new home on August 1.
But Jack, who’s buying Linda’s home, isn’t going to pay her until August 31.
Now, Linda’s stressed. She needs a temporary loan to help her pay for her new home on August 1, but she knows she can pay it off at the end of the month when Jack pays her.
That’s a closed bridging loan, because she knows when she’ll pay it off.
Closed bridging loans usually last up to 12 months.
An open bridging loan is for situations without a defined end date.
For instance, if Linda found and bought her dream home, but hasn’t yet sold her current one.
She needs a loan to cover the period until her house sells, which could take weeks or months. She doesn’t know. Since there’s no defined end date – it’s an open bridge.
Open bridging loans are typically available for up to six months.
That’s shorter than closed bridging loans because there is more risk for the lender.
Open bridging loans are much less common.
The pros and cons of a bridging loan are very simple.
If you need a temporary loan so you can get into your dream home, bridging loans can help. That’s the pro. But you need to know bridging finance is expensive.
You’ll pay a more expensive floating interest rate. The floating rate can easily be 1.5% above a normal one-year interest rate (for example). And you’ll often pay a premium on top of that.
I’ve helped some home owners get a bridging loan. Sometimes they will pay 2.5% above the one-year fixed rate.
And during this they still have to pay their other mortgage. So you’ve got to pay two mortgages at once.
Yup, bridging finance is expensive.
It’s also risky. Let’s say you need to sell your own home to pay back an open bridging loan.
If that doesn’t happen, or it sells for less, you might find yourself in a financially sticky situation.
Bridging finance can be expensive. You'll generally pay a floating rate, plus an additional premium.
Floating rates are often higher than fixed rates.
For example, while ANZ might offer a one-year fixed rate under 7%, the floating rate could be around 8.64%. Add the premium on top and you might pay about 9.6%.
For instance, if Linda takes out a $1 million loan at 9.6%, she will be paying around $1,800 per week in interest-only payments. That's on top of her existing mortgage.
This high cost is why bridging finance isn’t an option for everyone. It requires covering both mortgages, plus your normal living expenses.
Bridging loans can be hard to get, so it’s a good idea to speak to your mortgage broker before you commit to buying another property.
Of course, the banks will want to ensure you can afford the interest-only payments.
They’ll also look at how much you can sell your property for, and when they think you can sell it. They’ll look at this before agreeing to give you a bridging loan.
Most banks offer bridging finance if you meet their criteria. Some non-banks also offer bridging finance, like Avanti Finance.
Banks also look for a backup plan in case your home doesn’t sell, such as renting out your property.
Where I see people go wrong is they have rose-tinted glasses on when it comes to selling their house.
They want to buy the dream home, so they convince themselves their house will sell quickly.
Then, they convince themselves they can afford their normal mortgage and the bridging loan … until they can’t.
This can lead to financial issues.
For example, one homeowner I worked with wanted bridging finance.
I told her she really should wait for her house to sell, but she wouldn’t have a bar of it. She wanted the bridging loan.
So, I followed the client’s instructions. I got her the bridging loan and was careful to explain the pros, the cons and all the risks.
She used a local real estate agent, but then her house wouldn’t sell.
She had to lower the price to sell it in time to pay back the bridging loan. This meant she accepted a lower price than she wanted for the property.
So, not only did she end up paying an expensive bridging loan, she ended up with a bigger mortgage because she had to discount her property.
Bridging finance comes with significant risks.
It’s generally only a good option if you can afford both mortgages ... if your current house doesn’t sell as quickly as you thought.
It’s a short-term solution meant to bridge a gap, but the costs and risks involved mean it’s not the right fit for everyone.
Financial Adviser, With Over 10 years Experience
April Hastilow, financial adviser with almost a decade of experience in obtaining lending for over 500 clients, with access to every bank in New Zealand. A property investor herself, she is passionate about best structures, multi-banking and advocating for her clients through every step of their property purchases. April holds a level 5 national certificate in Residential lending.
