If you’re planning to move out of your existing home and looking to buy a new one, whether it be to upgrade or simply because it’s time to move on, bridging finance can be a great option to make that happen.

Coordinating the sale of your existing property and the purchase of your new one can be quite tricky! If you find the right property before you sell your existing one, you can also be at risk of losing your dream home if someone gets hold of it first.

The good news? We’ve got you covered!

Ready to find out how? Let’s dive right in!

What are bridging loans?

Bridging loans, also known as bridging finance, are usually a short-term solution.

They help bridge the gap between the purchase of your new property and the sale of your existing one, making the transition between one and the other a lot smoother.

How do bridging loans work?

Short answer, it depends.

In general, the lender you choose to proceed with will dictate what the process looks like. To understand this process, you’ll want to get familiar with two specific terms that are crucial in understanding the process; “peak debt” and “end debt”.

Let’s discuss these first…

What is “Peak Debt” and “End Debt”?

“Peak Debt” refers to the period when your debt is at its max. You are carrying both debts (the loan of your new home + the loan for your existing home + interest), and are still waiting to sell your existing property.

Once your property is sold, you are left with a remaining debt. The end position in which your only leftover is repaying the additional amount you needed to buy your new home! This amount is what we refer to as “End Debt”.

Lenders use these to work out your interest, how much they’d be willing to lend you, and if they would require any proof of savings in order to approve your bridging finance.

Why is this important?

Understanding ‘Peak Debt” and “End Debt” can help you understand what lenders can offer when it comes to bridging loans.

Whilst some lenders will require you to “service” or repay both loans or have savings in the loan account, others may only look at your end position (“End Debt”) and “capitalize” the interest on that end position to determine your repayments.

This sounds complex! Let’s break it down.

Usually during the bridging period, your repayments will only be made based on the “end debt”. This gives you time to transition and get organized before it’s time to transition.

When should you consider using bridging finance as an option?

Bridging loans are a great option if you’ve found a property that you love but have not yet had the chance to get your ducks in a row to sell your existing property.

Since you don’t really want to miss out on that property, bridging the gap and securing finance before the sale of your current home is key!

Though other options can help you transition from property A to property B, such as keeping  your existing property as an investment property, bridging finance may be the right choice over all other options if:

• you are not in the capacity to repay more than one loan at a time
• you’ve got really strong equity
• the remaining loan on your current property is low and
• you are in the capacity to service your “End Debt”

Bridging loans usually give you a 12-month period to sell. As a result, they can also be very helpful to buy some time and sell your property for the highest price possible! They take the urgency of the sale away so you can sell when you are confident the right offer is being made.

Who offers bridging loans? How can I access one?

Conventionally, most banks have pulled out of this space, which means it is an option you’ll mostly be able to access through your Rise High broker.

Though bridging loans may be your initial preference, we do encourage you to bring an open mind to the meeting as bridging finance is often more costly (interest rate wise) and we’d ideally like to find other options that are better suited to support your dreams and goals.

What are the pros and cons of bridging loans?

All finance products come with great advantages and other not so great conditions. In working out whether bridging loans are the right fit for you you’ll want to keep in mind the following pros and cons to make the right decision.

Bridging Finance pros:

• Avoid the selling stress! Decrease the rush and stress of selling your existing home before you buy your new one
• Get away with not renting during the transition process. Since there is no rush to sell and move out of your home, you won’t need to rent a place while you purchase and move into your dream home
• Secure the property you love before it gets snatched! Properties tend to come in and out of the market relatively quickly! Bridging finance enables you to secure the property as fast as possible, making it yours before someone else takes it from you

Bridging Finance cons:

• Interest rates are higher. Whilst on a bridging loan, you can expect to repay your loan at higher interest rates than an average home loan
• Exit strategies are a must! You need to know and show the lender your plan to repay the loan and move away from bridging finance
• Risks are higher. If your home doesn’t sell for the anticipated price, you do risk ending up with a higher End Debt position than expected

Are there any alternatives to bridging finance?

There are other options to bridging finance. However, making the right choice will ultimately depend on your personal circumstances. Let’s discuss these in greater depth.

If you are not looking to keep your existing property as an investment property you can also consider purchasing a property and having extended settlement periods on it. This can enable you to buy extra time to put your house on the market and sell, and allow you to bring settlement forward once the property sells, matching the date of sale with your settlement period as closely as possible.

Though this option is viable, you must be aware of the conditions in the market. If you are planning to buy in a market where demand is really high and supply is not as abundant, negotiating a longer settlement period may make your offer less attractive, increasing the risk that your dream home will be sold to a different buyer. Offering a higher price or premium could help manage this risk, increasing the odds of being successful.

Another option you can also explore is rent-back arrangements with the seller of the property or if you have equity in your property, you can consider choosing an equity release product instead, which can help you get the finance upfront.

As you can see, there are quite a few options out there!

If you are thinking of getting a bridging loan because you are looking to upgrade specifically, you’ll want to check out our guide on home upgrades and renovations to discover even more alternative options to bridging loans!

At Rise High, we understand that making the right choice can often feel overwhelming. If you have any more questions about bridging finance, upgrading or even downsizing to a new property, that’s exactly what we’re here for! We’d love to help, so please reach out to our wonderful team for your fee-free consultation!