Buying before you sell? Bridging loans explained

For many homeowners, timing is one of the biggest challenges when buying their next property. If you plan to sell your current home to fund your next purchase, a bridging loan may be worth considering.

Mortgage brokers have reported increased interest in bridging finance. Some buyers are exploring alternative ways to navigate higher living costs and rising interest rates.

Here’s how this type of finance works, along with some key considerations.

What Is a Bridging Loan?

A bridging loan is a short-term loan that may allow you to buy a new property before selling your existing one. It’s designed to ‘bridge’ the gap between the two transactions.

A lender can use the equity in your current property to support the purchase of your next home.

In competitive markets, housing supply can be tight and properties can sell quickly. Some buyers use bridging finance as a way to act sooner.

Making an offer ‘subject to the sale of your existing property’ may be less appealing to some vendors. Bridging finance may offer a way around this. You could structure your offer ‘subject to finance’ instead, which some vendors view more favourably.

Bridging finance may also help you avoid temporary accommodation between selling and buying. A range of homeowners use it, including those looking to upsize, downsize or relocate.

How Do Bridging Loans Work?

Bridging loans are often structured over six to 12 months. In some cases, they may only be needed for a few weeks if the existing home sells quickly. Lenders can also structure bridging loans in different ways.

When you apply, the lender temporarily finances both properties. That includes the one you intend to sell and the new property you want to buy.

The ‘peak debt’ is the combined loan amount across both properties. It may include the remaining balance on your existing home loan, the purchase price of your new property, and associated buying costs.

Repayments are generally interest-only. Interest is sometimes added to the loan balance, known as capitalisation, until the sale completes.

Once you sell your existing home, the proceeds reduce the loan. You are then left with a standard mortgage secured against the new property.

Reasons You Might Use a Bridging Loan

Bridging finance comes with risks, but it may be worth considering if:

• You find the right property before your existing home sells
• You want to avoid temporary accommodation between sale and purchase
• You need options in a fast-moving market where demand outstrips supply
• You have a decent amount of equity in your existing home

Potential Drawbacks to Consider

There are some possible downsides to keep in mind:

• Interest rates for bridging loans may be higher than for standard loans
• Carrying debt on two properties can create financial pressure
• The cost of a bridging loan may need to be weighed against alternatives, such as renting between sales
• If your property takes longer to sell, or sells for less than expected, you may face a shortfall. This could mean contributing extra funds or taking on more debt

What Lenders Will Assess

When assessing your application, lenders will consider:

• The equity and value of your existing home
• Your ability to service the peak debt across both properties
• The expected sale price of your current home
• Relevant market conditions

Ready to Purchase Your Next Home?

Bridging loans suit borrowers with sufficient equity and a clear exit strategy, such as a planned property sale. They offer flexibility with timing, but understanding the costs, risks, and suitability for your situation is important.

To explore whether bridging finance could work for you, get in touch today.