What is a bridging loan?

• Designed to allow the purchase of a new property prior to the sale of an existing property
• Loan amount will depend upon the equity in the existing property
• Repayment requirements vary from lender to lender and may be interest only, principle & interest or on occasions interest may be partially or fully capitalised (added to the loan) up to a pre-determined maximum combined loan to value ratio (LVR)
• When the existing property is sold, the residual debt becomes the ‘end loan’
• ‘Capacity to repay’ is either calculated on the peak debt which makes it tough for borrowers to satisfy or else on the ‘end loan’ only

Scenario

Mr and Mrs Jones currently have an ANZ home loan of $150,000 secured by their current home valued at $400,000. They are looking to sell this property and have purchased a new home for $500,000. As the new property will settle prior to their existing home, they require an additional loan of $525,000 to cover purchase price and associated costs.

This would result in a peak debt of $675,000 (current home loan $150,000, purchase price $500,000 and costs of about $25,000) with security held totaling $900,000. LVR on peak debt is 75%, which is acceptable  as it falls under 80%.

In order to set up a bridging facility ANZ would need to ascertain what Mr & Mrs Jones would clear from the sale of their current home. In this instance we would estimate this at $360,000 (estimate sale price $400,000 less 10% in costs of $40,000). That would leave a residual debt of $315,000. This leaves a LVR of 63% against the purchased property.

Loans would therefore be set up in the following manner:

• Bridging loan of $360,000 interest only over a 6 month term secured against both properties
• Residual loan of $315,000 principle & interest over a standard 30 year loan term

NB: The bridging loan above is the amount they will payout once the existing property is sold. Applicants must show they can service the residual loan plus 6 months of interest only loan repayments on the bridging loan.

Benefits of a bridging loan

• You are able to purchase a new property without having to sell your existing property first
• If you are building a new property you may remain in your existing home until completion
• A bridging loan term of six to 12 months means less pressure to sell quickly
• Most lenders offer standard interest rates instead of paying an inflated ‘bridging rate’, which means interest savings to you.
• Flexible repayment plan to suit your individual needs.