How a bridging loan works
Bridging loans are usually negotiated as an interest-only loan, which means you will only pay the interest on the loan without making repayments to the principal balance.
If you are purchasing an existing home, a bridging loan usually gives you around six months to sell your home. If you are building your new home you will have up to 12 months on your bridging loan, which gives you time for both the new build and the sale of your current home.
Capitalising your loan
In some cases you may be able to capitalise your loan. This means you won’t need to make payments on the new loan while you are selling your existing home – instead you will take out an entirely new mortgage to pay for your existing home and the new property.
While it can be convenient to deal with the sale before worrying about paying off a new loan, you will most likely end up with a slightly higher new loan to cover the accrued costs involved with this option.
You will need to consider if this is the best option for you, but you can always talk to one of our brokers if you have questions or concerns.
Taking the market into account
It’s important to be aware of the state of the market when you take out a bridging loan. If you’re selling in a slow market, you may have trouble selling your home within the allowed six-month time frame. If this happens, you will accrue additional interest on the bridging loan, and your new mortgage could end up higher than expected.
On the other hand, if you make a fast sale, the bridging loan will work in your favour as there will be minimal time for the interest to build up before you start making payments on your new mortgage.
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