A Guide to Bridging Loans: Buy Before You Sell

What is a Bridging Loan?

Imagine finding your dream home before you've sold your current property. It's a common situation that many Department of Home Affairs employees face when upgrading their living situation. This is where bridging finance comes into play.

A bridging loan is essentially short term property finance that helps you bridge the gap between buying a new property and selling your existing one. Think of it as temporary finance that gives you the breathing room to buy before you sell, avoiding the rush and potential compromise of having to sell first.

Instead of coordinating settlement dates perfectly or rushing through a sale, you can secure your new home with confidence. The bridging loan covers the deposit and associated costs for your new property while you still own your current one.

How Does Bridging Finance Work?

The mechanics of a bridge loan are relatively straightforward. When you apply for bridging finance, the lender uses both your current property and your new property as bridging loan security. This means you're effectively borrowing against the equity in your existing home.

Here's what typically happens:

1. You find a property you want to purchase
2. You submit a bridging finance application
3. The lender assesses both properties and your ability to service the loans
4. Upon bridging loan approval, funds are released to purchase the new property
5. You sell your existing property during the bridging period
6. The proceeds from the sale pay off the bridging loan

Most bridging loans operate on a 6 month bridging or 12 month bridging term, giving you a reasonable timeframe to sell your current property without pressure.

Understanding Bridging Loan Costs

Let's talk about what bridging finance costs you can expect. Transparency around fees is important when considering any loan product.

The bridging loan interest rate is typically higher than standard home loan rates because you're borrowing for a short term loan period. However, many lenders offer interest capitalisation, meaning the interest is added to the loan amount rather than requiring monthly payments. This capitalised interest approach means you won't face two mortgage repayments plus rent during the transition period.

Bridging loan fees can include:

• Application and establishment fees
• Valuation fees for both properties
• Legal fees for settlement
• Monthly account keeping fees
• Exit fees when you repay the loan

The bridging loan amount you can access depends on your loan to value ratio (LVR) across both properties. Generally, lenders will look at the combined bridging loan LVR to ensure there's sufficient equity and security.

The Benefits of Bridging Finance

For Department of Home Affairs employees, bridging loan benefits are particularly relevant given the stable employment and income security that comes with public service roles.

Key bridging loan benefits include:

• Avoid selling first: You don't need to sell your current home before buying your next one
• Seamless property upgrade: Move directly from one property to another without temporary accommodation
• Buy dream home: Don't miss out on the perfect property because of timing
• No rush to sell: Take your time to achieve the right price for your existing property
• Auction finance: Participate in auctions with confidence knowing you have funds available

With access to loan options from banks and lenders across Australia, Public Home Loans can help you find bridging finance that suits your circumstances.

Potential Bridging Loan Risks to Consider

While bridging loans offer significant advantages, it's important to understand the bridging loan risks involved.

The main bridging loan risks include:

• If your property doesn't sell within the bridging loan term, you may need to extend the loan or consider a bridging loan refinance
• Higher interest rate compared to standard home loans
• You're effectively managing two properties and their associated costs
• If property values drop, you might face challenges with the sell property exit strategy
• The pressure to sell within the temporary finance period

Having a solid exit strategy is crucial. Most people plan to sell their existing property, but alternative exit strategies include refinancing the combined debt into a standard home loan or converting your old property into an investment property.

Who Should Consider a Bridging Loan?

Bridging finance isn't for everyone, but it works particularly well for Department of Home Affairs employees who:

• Have substantial equity in their current property
• Work in stable, secure employment (a hallmark of public service roles)
• Have found their ideal next home
• Want to avoid the stress of coordinating exact settlement dates
• Prefer selling after buying rather than the reverse
• Need quick bridging finance for urgent finance situations or auction finance

For those looking at buying your next home, a bridging loan can provide the flexibility to move at your own pace.

The Application Process

Submitting a bridging loan application through Public Home Loans means you'll benefit from specialist knowledge of products available to public servants.

The bridging loan application process typically involves:

1. Initial consultation to discuss your situation
2. Property valuations for both homes
3. Income and employment verification
4. Assessment of your exit strategy
5. Exchange contract details for the new property
6. Bridging loan settlement arrangements

Timing is often critical, which is why fast approval processes are valuable. With the right preparation and documentation, bridging loan approval can happen quickly, allowing you to proceed with confidence.

Alternatives to Bridging Loans

While bridging finance can be incredibly useful, it's worth considering bridging loan alternative options:

• Selling first then buying: The traditional approach eliminates the need for temporary finance but may require interim accommodation
• Equity release: Accessing equity through a home loan refinance to fund the deposit
• Personal savings or offset account: If you have sufficient funds saved
• Family guarantor: Having family provide security for part of the loan
• Extending your current home loan: Some lenders may allow you to increase your existing mortgage

Each option has different implications for your finances, so speaking with a mortgage broker who understands public service lending is worthwhile.

Making Your Decision

Deciding whether bridging finance is right for you involves weighing up the costs, benefits, and your personal circumstances. Consider your:

• Current equity position
• Confidence in selling your existing property within the bridging period
• Financial capacity to manage bridging loan repayment if needed
• Timeline for finding and securing your new home
• Comfort level with the associated risks

For Department of Home Affairs employees, stable income and employment can make bridging finance more accessible with favourable interest rate discounts and terms.

Your Next Steps

Whether you're considering bridge loan buying or exploring other options for your property upgrade, having specialist advice makes all the difference. Public Home Loans understands the unique position of public service employees and can help you explore suitable finance solutions.

From understanding variable interest rate options to calculating the right loan amount for your situation, our team has the expertise to guide you through the process. We work with multiple lenders to find bridging finance that aligns with your needs and circumstances.

Ready to explore your options for buying before you sell? Call one of our team or book an appointment at a time that works for you. We're here to help Department of Home Affairs employees achieve their property goals with confidence.