Bridging loans vs home loans: what’s the difference in Australia?
Bridging loans are a fantastic financial solution for people who buy a new home before they’ve sold their existing one. But what’s the difference between bridging loans and home loans?
What is a bridging loan and how do they work?
Sometimes called bridging finance, bridging loans are often utilised by buyers who purchase a new home before selling their current one, instead of vice versa.
These short-term, high-interest loans are essentially home loans but enable buyers to use the equity on their current property as the deposit for their new property.
The lender will combine this equity with the new property’s purchase price, and other fees and charges; or in other words, they’ll combine the balance of your current mortgage with your new loan.
The sale price of your existing property will go towards the combined, or bridging loan, and from then on, will be one standard home loan.
In other comparisons between bridging loans and home loans, bridging loan holders will need to make regular, interest-only repayments on this loan until their existing home sells. Alternatively, they can repay these funds as a lump sum when they sell their first property.
In addition, buyers can choose between a closed or open repayment date for their bridging loan. But these loans will still expire at the end of 12 months so even buyers who decide on an open date loan type will need to repay it within this period.
After this time, buyers will be subject to extra fees and charges, and possibly a forced sale of their current property by the lender.
What is a home loan and how do they work?
Home loans enable buyers to purchase a home by borrowing up to 95% of the property value, from a lender. Or, in the case of the Help to Buy Scheme, eligible first home buyers may only need a 2% deposit.
Lenders generally prefer a 20% deposit, so buyers should aim for an 80% Loan to Value Ratio (LVR) mortgage. Doing so will mean you won’t have to pay Lenders Mortgage Insurance. It could ensure a better interest rate too because for lenders, a higher deposit equals a lower-risk home loan.
Fixed home loans: security but not flexibility
Standard home loans offer a fixed or variable interest rate, with fixed home loans having a set expiration date of between one to five years, although some lenders offer 10-year fixed rate loans.
Either way, fixed rate home loans give home owners the security of unchangeable interest rates, regardless of Reserve Bank of Australia (RBA) national cash rate moves and other market fluctuations. This security can be wonderful when rates are increasing but unfortunately, you also won’t enjoy the benefits of decreasing rates.
Fixed home loans also mean repayments are fixed at a certain minimum and maximum amount, after which lender fees will be charged. Plus, extra, highly helpful features such as offset accounts and redraw facilities are rarely included in these loans.
Variable home loans: flexibility but not security
While variable loans are subject to RBA cash rate ups and downs – which is great when rates are dropping – they also come with offset accounts and redraw facilities. These handy additions can boost your finances in many ways.
For example, home owners can use their savings to offset their home loan rates. They can also utilise their redraw facility for emergencies, renovations or other issues – if they’ve made the extra repayments that are possible with variable loans, all without fees and charges.
Bridging loans vs home loans: key differences
Bridging loans
- Ideal financial solution if you’ve bought a new home before selling your current one
- High interest rates, due to high-risk nature
- Short-term availability of 12 months at best, regardless of fixed or open date loan type
- Interest-only loan means ultimate mortgage may be considerable
- Possibility of extra fees and funds, or forced sale of current property
Home loans
- Allows you to buy a home by borrowing up to 95% of the property value from a lender
- Good idea for home buyers who’ve sold existing home before buying another one
- Lower interest rates, depending on deposit figure or equity on existing property
- Long-term availability, especially for variable rate loans
- Choose from fixed loans’ security or variable loans’ flexibility
- Principal and interest repayments readily available
Bridging loans vs home loans: best options for different situations
- Buying your first home: since you haven’t purchased a property before, your one and only option will be taking out a standard home loan.
Aim for a 20% deposit, or 80% Loan to Value Ratio (LVR) mortgage; alternatively, explore the smaller deposit options available to you through first home buyer government schemes - Upgrading to larger, or more expensive home: you have the option of either a bridging loan or taking out a new home loan. But what’s important in this case is that generally speaking, you’ll be buying a pricier property. This means the sale of your current home will only pay for some of your new one – not all.
Your new home loan, and its repayments, will also be larger than your existing one. This doesn’t mean upgrading is impossible, but it should be carefully considered.
You might choose to hold onto your property as an investment, or purchase a smaller, more budget-friendly upgrader house. - Downsizing to smaller or less expensive home: again, you have the option of taking out a bridging loan or a standard home loan – or no home loan at all!
Either way, you’ll be in a much better financial situation than upgraders, because as a rule, your present property will be of higher value than your new one.
As a result – and especially if you’ve sold your home before buying another one – you can use all the cash from this sale for your next purchase. If you can do this, then you’ll be in the enviable state of being completely free from mortgage stress.
- Selling before buying – a standard home loan is best for you. You may be able to utilise your current home loan’s “loan portability” or “substitution of security” option. Not all home loans offer this option but if they do, you can simply have your loan switched to your new property.
This saves you the stress, hassle – and fees – of closing your existing loan and taking out a new one, or possibly refinancing.
However, this option is usually only open to properties which settle on the same day, or the settlement dates are very close.
Seek professional advice
Both bridging loan and standard home loans come with risks and benefits. So, before applying for either, always discuss your plans with an expert, like a mortgage broker.
Our team at Intuitive Finance can walk you through the figures and data, as well as market ups and downs, to ensure you make the best loan decision for you and your family.
So, if you’ve got questions or concerns, just reach out to us.
Reach out to Intuitive Finance today and discuss your needs with our brokers.
