What is bridging finance? And should you use it?

One of the common dilemmas homeowners face when they are looking to purchase a new home is whether they should sell or buy first.

Many people would prefer to be able to buy a property before selling their current one so they don’t risk a long period of being without a home, but this can make financing tricky – which is where bridging finance can come in handy.

A bridging loan is essentially when finance is provided to purchase a new home before your old home has sold.

It is usually an interest only loan that covers a period of up to 12 months, though sometimes it is shorter.

During this time, or until your property sells, you will need to be able to make payments on your existing home loan and on the bridging finance loan.

If your existing property doesn’t sell in the specified period then the lender will sell your property and take whatever offer is best at the time.

Pros of a bridging loan:

Makes juggling a purchase and sale easier.
You can take your time getting a good price on your existing property.
You can avoid the need to move twice.

Cons of a bridging loan:

You will be paying interest on two properties – which may add up to a lot if it takes you a long time to sell.
May not be available with your current lender – meaning you may need to switch your loan to a new lender to make it work.
May make you settle for an offer on your existing property quickly, leading to a lower sale price than hoped.
Not everyone qualifies. Normally at least 20% equity is needed in your home, plus you will need to be able to finance the cost of both loans.

What are my options if I don’t use bridging finance?

There’s nothing to say you need to use bridging finance to manage a purchase and a sale.

In many cases it can be less stressful to sell your current property first, so you know exactly how much you have to spend on your next home and you don’t need to worry about servicing two loans.

Selling first can be made easier by negotiating a long settlement period, which will buy you some extra time.

The new owner may even be happy to let you rent at the property for a time as a condition of the sale.

If you think a bridging loan may be for you though then it’s a good idea to have a chat to your lender to find out what your options are.