Key Takeaways
• A bridging loan lets you buy your next home before your current one has sold, with one lender temporarily holding the loans on both properties.
• The better bridging products assess your capacity to service repayments on the 'end debt' (- the amount you'll be left with after your sale has completed) and not the much larger temporary 'peak debt', which most people couldn't manage.
• Some products do not require you to make any repayments during the bridging period. Instead, interest is capitalised or added to the loan. Any repayments you do make will ultimately reduce the amount of interest charged.
• In most cases where people use bridging finance they tend to only need it for a short period - usually not more than 4 - 6 weeks.
• You can have it both ways - get pre-approved for bridging finance and if you end up not needing it, the same application can be easily amended to a standard loan on a competitive rate
It's one of the most common problems people face when moving from one home to the next. The order of events, timings, etc rarely line up the way you want them to. Do you sell first and risk having nowhere to live? Or buy first and risk the stress of feeling under pressure to sell your existing home quickly? Bridging finance exists for exactly this situation - and it's far less scary than most people think.
Why does bridging finance have such a bad reputation?
Most people flinch when they hear the phrase 'bridging finance' even being mentioned. It has a longstanding association with high costs, and I'll say upfront - if you can get by without it by lining up your settlements to take place simultaneously, or negotiating a longer settlement on your purchase, so much the better. But the products have moved on a long way from the ones that earned the reputation. Once you understand how modern bridging finance actually works, you may come to see the benefits it can provide in terms of flexibility and control over one of the potentially more challenging transactions you’re likely to undertake.
How a bridging loan actually works
Some lenders call this bridging finance, others a relocation loan. The labels differ but they solve the same problem;
During the bridging period, one lender has security of both properties - your existing home and the one you’re buying. The total you owe at that point is called your 'peak debt' and is made up of your current mortgage, plus whatever is needed to complete the new purchase, including stamp duty and costs. When your existing home sells the peak debt is reduced and what remains is called your 'end debt' - which simply becomes a normal home loan on your new property, at a competitive standard rate.
The part that surprises people - how you're assessed, and what you pay
This is where the better bridging products can make life so much easier. The lender understands from the outset that the peak debt is temporary. So rather than testing your capacity to service the full peak debt - which most people couldn't, they test your capacity to make repayments on the end debt - the loan you'll actually be left with once your sale goes through.
Better still, while the peak debt is drawn you aren't required to make repayments at all. Interest during the bridging period is charged at the lender's standard variable rate and capitalised - or added to the loan. You're welcome to contribute if you want to reduce the overall interest cost, but you won't be carrying two sets of crushing repayments while you wait for your sale to settle. And the assessment has protection built in - the lender allows for the capitalised interest on the assumption you bridge for the maximum period - worst case scenario, plus buffers. So you're not forced into selling your home at a discount.
What does it actually cost?
Interest is charged at the standard variable rate throughout the bridging period and when you look at the average peak debt amount these days, the numbers can get big quite quickly.
But based upon your current mortgage balance, the target price of the property you're trying to buy and what you expect to sell for, it’s possible for us to work out exactly what the bridging finance will cost per week to hold. Given that in the majority of cases the bridging loan is only required for a short period, in the overall scale of the transaction, the cost is often negligible compared with the flexibility it buys you - the ability to secure the home you want, move when you want, and sell your existing home properly rather than desperately.
The smart move - the pre-approval that covers every scenario
Here's the approach I recommend to most clients in this position: get pre-approved for the bridging product before you commit to buying anything. If you end up needing the bridging finance your existing lender is simply paid out at settlement of the new purchase property and the additional funds to complete the purchase are provided.
If you manage to negotiate simultaneous settlement of the sale and the purchase (- it may sound unlikely but it happens all the time) and the bridging isn't needed after all, the approval can be amended, and you settle on a standard loan at a competitive rate.
Either way, once your existing home has sold, you're left with a standard loan - and if you never use the bridging option, it hasn't cost you anything extra. You're covered for every scenario, and that certainty is worth a great deal when you're making offers or want to move quickly on the property you’d like to buy.
Not every lender does bridging well
Not every lender offers bridging finance, and among those who do the products differ enormously. Some still test you on the peak debt or require repayments at potentially unmanageable levels during the bridging period. The better products work the way I've described above, and knowing which lender's version does what is precisely the kind of thing a broker deals with every week. With more than 30 lenders on my panel, I can tell you which products would actually work for your circumstances, run the cost-per-week numbers on your scenario, and set up a pre-approval that covers you whichever way your sale and purchase land. If you've found the next home before the current one has sold - or you can see that situation coming - book a chat and we'll work through it together. My service is free.
FAQ
Q: Is a relocation loan the same as a bridging loan?
Essentially yes - 'relocation loan' is just what some lenders call their bridging product. Whatever the label, it solves the same problem: buying your next home before your current one has sold.
Q: What's the difference between peak debt and end debt?
Peak debt is the total you owe during the bridging period - your existing mortgage plus everything needed to complete the new purchase. End debt is what's left once your home sells and the peak debt is paid down. The better bridging products assess your borrowing capacity on the end debt only, because the peak is temporary.
Q: Do I have to make repayments during the bridging period?
With the better bridging products, no. Interest is capitalised - added to the loan. You can voluntarily contribute however much you like to reduce the interest cost, but you're not required to carry repayments on the peak debt.
Q: How long do people usually bridge for?
The facilities typically allow up to twelve months, and the approval will cover you for the worst case scenario. In practice, most people only bridge for around four to six weeks.
Q: What happens if my settlements end up lining up after all?
Then you don't need the bridging finance. No need to re-apply as the pre-approval can be amended and you settle on a normal loan at a competitive rate. Setting up bridging pre-approval costs you nothing extra if you never use it.
Q: Do I have to move my current home loan to get a bridging loan?
You can be pre-approved for bridging finance regardless of which lender your current loan is with. If the bridging finance is used, your existing lender is simply paid out at settlement of the new purchase as part of the process.
