Bridging loans: Yard Guide to bridging finance, and how they work

What is a bridging loan and what is it for?

A bridging loan is a short-term loan designed to cover the purchase price or construction cost of a second property, and gives you time to sell your existing property. 

The loan provides you with a “bridge” between buying and selling. Once your current home is sold, the original mortgage is discharged and the loan converts to a standard Yard home loan. A bridging loan can also provide finance to build a new home while you live in your current home. 

There are two types of bridging loans:

Closed bridging loans

Opt for a closed bridging loan if you have a pre-agreed sale date for your property, and know the date when your home will be sold and the funds received. You will pay off the loan plus any accrued interest and fees on the sale date.

Open bridging loans

Opt for an open bridging loan if your current home hasn’t been sold yet, and you do not have an agreed sale date. This type of loan can typically be taken out for 6-12 months.

Now that we have an overview of bridging loans, let's find out how they work.

How does bridging finance work?

When you take out a bridging loan, the lender usually takes over the mortgage on your current home, as well as financing the purchase of the new property. This means your total borrowing includes:

• The balance of the loan on your current home
• The contract purchase price of the new home 
• Any costs associated with these two transactions, including any fees attached to the loan, stamp duty and legal fees.
  

Once your current home sells, the proceeds of the sale (minus any sale costs) are used to reduce the total amount you owe, and the loan reverts to a standard home loan. Bridging loans are a short term product, so typically run for up to 6 months when you are buying an established property, and up to 12 months if you are building a new property. 

In terms of how much you can borrow with a bridging loan, the general rule of thumb is that the more equity you have in your home, the more you can borrow. Yard can provide a bridging loan for up to 80% loan-to-value ratio of the combined value of the two properties.

Tip: Use our home equity calculator to estimate the available equity in your current property. 

Let’s look at a real-world example. 

Bridging loan: Case study

Let us assume the balance of the loan on your current home is $200,000, and you require $500,000 to purchase the new property. 

This means you will need a bridging loan of $700,000. This total - called peak debt - is what interest is payable on until the sale of your existing property. 

When you sell your existing home with a profit of $300,000, and put this toward your combined debt you are left with $400,000 ($700,000 - $300,000). This amount - referred to as the end debt or ongoing balance - now reverts to a ‘residual’ standard home loan with regular repayments.  

You may be wondering how your mortgage repayments work during the bridging period?

How are mortgage repayments calculated during the bridging period?

The mortgage repayments during the bridging period are calculated on an interest only basis. The interest can also be capitalised, i.e. added to the loan amount you will owe at the end of the bridging period once your property is sold. 

With a Yard bridging loan you can make unlimited repayments during the bridging period and also use an offset facility to minimise the amount of interest you are charged.

Now let’s move onto the pros and cons of this type of product. 

Advantages of bridging loans: how can they help me?

Bridging loans are useful in a number of different situations, such as when you want to stay in your current property while you build/construct a new property, or if you find a new home but aren’t yet ready to sell your existing home. Some of the obvious advantages bridging finance gives you include:

• You can wait until you get the right price for your home with no pressure to accept a low offer.
• The flexibility to remain in your current home and avoid paying rent until it sells.
• You can buy a new property immediately without having to wait for your existing home to sell. 
• A bridging loan allows you to borrow up to 100% of the purchase price of a new property, plus associated costs - meaning you have more purchasing power.
  

It’s important to weigh up any potential downsides or cons as well.

Bridging loan downsides: what to look out for

Like any financial product you need to look at all features of bridging loans, and how they could potentially impact you. These could include:

• You will need to pay interest on the peak debt at the end of the bridging period, so need to budget for this. 
• The longer it takes to sell your current property, the more interest will accrue making the loan more expensive.
• If your current property sells for less than your asking price, you could be left with a larger ongoing loan amount, which could put financial pressure on you.
• There are other costs associated with a bridging loan, which could include valuation fees for both properties, which you need to budget for.
• Some lenders could include conditions in the loan allowing them to charge a higher interest rate if you don’t sell your property within the stated time frame.
  

Now you know all the pros and potential cons of bridging finance, let’s look at what lenders are looking for when you apply for this product.

Qualifying for a bridging loan: what lenders are looking for

Lenders are going to require a range of evidence to qualify for a bridging loan, including that you:

• Can repay the bridging finance interest costs during the period between buying and selling. 
• Have a minimum level - typically 20% - of the peak debt in cash or available equity. 
• Have a 5% -10% deposit toward your new property purchase.
  

Bridging loans can also provide financing if you want to build a new home.

Building with a bridging loan

A bridging loan, or bridging finance can also be helpful if you want to stay in your current property while you build a new home. It means you don’t have to sell and rent somewhere for the interim. You also avoid the hassle and cost of moving twice. If you are building a new home the bridging loan term can be up to 12 months, which can give you valuable time to complete the build. 

If you have decided that a bridging loan is not for you, you may want to explore other options that could work for you. 

Are there other options to bridging finance?

If a bridging loan does not suit your circumstances you can:

• Sell and move into a short-term lease or rental, though you may still have to store some/all of your possessions.
• Negotiate a longer settlement period on the sale of your home, so you have more time to find a new house. This also means you only have to move once.
• Arrange to rent your current home from the new owner, giving you time to find a new property.
• Stay with families or friends to avoid having to pay rent, though you may still need to store your possessions somewhere.
  

How do you apply for a bridging loan? Much like a regular home loan, here is our easy three step process.

Apply for a bridging loan in 3 easy steps 

Wondering how to apply for your first home loan? 

With Yard it's a simple, three step online application you can complete anytime, from any device. Bridging finance can take up to 5 days to be approved in most cases, depending on your circumstances. 

Step 1
Tell us about yourself: Securely share your personal financial details. We verify your identity, credit history and financials online.

Step 2
Design your loan: Design the features of your loan to match what works best for you.

Step 3
Get approved! When all of your details check out, we provide you with the decision on your loan!

We then settle your loan and take care of the rest so you can focus on securing your new home. 

Don’t forget to check out our range of handy calculators that take the hassle out of working out how much you can borrow and what loan is right for you.

Have any questions about bridging loans - or anything else? We’re happy to help, and our local team are available to chat at a time that suits your schedule.