If you’re selling your property and purchasing a new property and need to own both at the same time for a short period, this is where you may require a bridging loan.
What is a Bridging Loan?
A bridging loan is a short-term mortgage typically used to cover the gap between the sale of an existing property and the purchase of a new one. They are helpful for people who need immediate funding but are awaiting the proceeds from another property’s sale. Due to their short-term nature, bridging loans often come with higher interest rates than traditional mortgages, and they usually need to be repaid quickly—often within 6 months.
There are two types of bridging loans.
Closed Bridge
This is where the sale of your property is unconditional, and you have a known settlement date for this. You therefore need your bridging loan for a closed period between the settlement of your new purchase and the settlement of your existing property.
These are seen as low risk, because the exit is clear, and the additional costs can easily be calculated. Closed bridges are therefore reasonably straight forward to get from main banks. The key here is for you to have enough equity in your properties to fit the banks criteria, plus evidence you can afford the additional interest costs you’ll be charged over this time. It also helps if your mortgage on the property you’re selling and the mortgage with the property you’re purchasing are with the same bank. The bridge loan is usually just an additional loan at the banks floating interest rate and interest only repayments until repaid and closed.
Open Bridge
This is where the settlement of the new property is set, but the sale or settlement of your existing property is still unknown. You therefore need your bridging loan for an open period between the purchase of your new property and the potential sale of your existing property.
It is possible to get an open bridge from a main bank. The key here is you need to have great equity and be able to afford to both mortgages at the same time in the eyes of the bank.
If you don’t have enough equity, or the bank doesn’t believe you can afford both mortgages at once, the unknown length you’ll need this loan for is seen as too high risk for the main banks. A non-bank lender may still be able to offer you an open bridge though, as they have different criteria. This can be a costly exercise as you’ll need to pay an application fee, plus will receive higher interest rates from the non-bank lender than the main bank. If you don’t have the deposit available, you may also have to refinance your existing property for a short term, which comes with additional costs. You’ll still need to have good equity in your property to make this works and often having a decent amount of savings set aside to cover the additional interest costs for several months is key to getting these approved.