Bridging Home Loan in Melbourne: What You Need to Know

Bridging home loans offer a practical solution for buyers needing to purchase a new property before selling their current one. These short-term loans help cover the financial gap, providing peace of mind during potentially stressful times.

 

A mortgage broker such as the team at LM Connect can guide you through the bridging loan process, helping you understand loan rates, repayments, and requirements. Their expertise simplifies the complexities, so you can make confident, informed decisions. 

Let’s dive into the essentials you need to know about bridging loans and how they can make homeownership transitions smoother.

What Is a Bridging Home Loan?

A bridging home loan, or bridging loan, is a short-term loan that helps you buy a new property while you wait to sell your current property. It essentially “bridges” the financial gap between purchasing a new home and selling your existing one, ensuring that you have the funds to secure a new property even if the sale of your current property hasn’t been finalised.

How Bridging Loans Differ from Traditional Home Loans

Unlike traditional home loans, bridging loans are temporary and usually have higher interest rates. Bridging finance generally requires structured repayments, which differ from standard home loans that stretch over 25-30 years.

Key Features of a Bridging Home Loan in Melbourne

Before diving into details, let’s review the key features of a bridging loan. These short-term loans, typically lasting 6-12 months, are tailored for quick property transactions.

• Higher Interest Rates
  Bridging loans often come with a variable rate, usually higher than a standard home loan.
  
  
• Peak Debt Calculation
  Lenders calculate peak debt as the combined loan balance of your current property and the new purchase.
  
  
• Flexible Repayment Options
  During the bridging period, you may have options for interest-only monthly repayments to manage cash flow.
  
  
• Additional Costs
  Be prepared for upfront costs, repayment fees, and other extra costs like stamp duty and settlement fees.

These features make bridging loans ideal in Melbourne’s competitive real estate market, where buyers need extra time and financial flexibility to secure their new homes.

Types of Bridging Loans Available in Melbourne

Different types of bridging loans suit various financial situations and timelines. Closed bridging loans are ideal for those with a set sale date on their current property, while open bridging loans offer flexibility for those still in the selling process and unsure of the settlement period.

• Closed Bridging Loans: Ideal if you have a confirmed sale date for your current property. These loans reduce risk by setting a clear repayment timeline.
  
  
• Open Bridging Loans: Suitable if your property is on the market but not yet sold. Open loans are riskier and may attract higher interest rates due to the uncertain repayment time frame.
  

Common Bridging Loan Structures

When applying for a bridging loan in Melbourne, you'll typically encounter two main structural options. Understanding these structures is crucial as they affect your repayments, interest calculations, and overall loan management.

1. Peak Debt Method (Combined Loan)

The peak debt method is the most common bridging loan structure in Melbourne. Here's how it works:

Formula:  Peak Debt = Existing Loan + New Property Purchase Price + Stamp Duty & Costs - Cash Contribution

Example:

• Existing home value: $800,000
• Existing mortgage: $400,000
• New property price: $1,000,000
• Stamp duty and costs: $55,000
• Cash contribution: $50,000
• Peak debt: $1,405,000

Key Features:

• Single loan facility
• Interest calculated on total peak debt
• Simplified paperwork and management
• Usually more cost-effective
• Popular with major banks like NAB and ANZ

Advantages:

• Easier to understand and track
• Often lower establishment fees
• Single loan statement
• Potentially lower interest rates
• Simpler discharge process

Disadvantages:

• Higher interest charges on total debt
• Less flexibility with different lenders
• May require all loans with same bank

2. Separate Loan Method (Split Loan)

The separate loan method maintains your existing mortgage while creating a new bridging facility.

Structure:

• Existing mortgage continues unchanged
• New bridging loan covers the shortfall
• Two separate loan accounts

Example:

• Keep existing $400,000 mortgage
• New bridging loan: $605,000
• Total borrowing: $1,005,000

Key Features:

• Two separate loan facilities
• Different interest rates possible
• More complex administration
• Popular with non-bank lenders
• Greater flexibility

Advantages:

• Keep existing loan arrangements
• Possibility of different lenders
• More control over each loan
• Easier to track individual costs
• Can maintain better interest rates on existing loan

Disadvantages:

• Multiple loan statements
• Higher administrative fees
• More complex management
• Potentially higher overall costs
• Two discharge processes
  

How a Bridging Home Loan Works

A bridging home loan is designed to help you buy a new property before selling your current property, covering the financial gap during the bridging period. Here’s a quick breakdown of how it works:

Step 1: Apply for a Bridging Loan

Start with a loan application, providing details about your current property, financial situation, and purchase price of the new property.

Step 2: Calculate Peak Debt

The lender calculates your peak debt by combining the outstanding loan balance on your current property and the cost of the new one.

Step 3: Interest-Only Payments During the Bridging Period

During the bridging loan term (typically 6-12 months), you may only need to make interest-only monthly repayments to ease cash flow.

Step 4: Sell Your Current Property

Once your current property sells, you use the sale proceeds to pay down the bridging loan, covering both the loan balance and any additional costs.

Step 5: Transition to a Standard Home Loan

After the sale, your bridging loan converts to a standard home loan on the new property, with regular repayment terms and variable interest rates based on your loan type.

This process helps you secure your new home without the financial pressure of an immediate sale.

Eligibility Criteria for a Bridging Home Loan in Melbourne

To qualify for a bridging loan in Melbourne, lenders typically assess your financial situation, including loan balance and property value. They also consider factors like monthly repayments, settlement fees, stamp duty, and the bridging period to ensure you can manage the peak debt during this short-term loan.

1. Income Verification:  Applicants must prove stable income through recent payslips or tax assessments. Self-employed individuals may need additional financial statements.

2. Credit History:  A solid credit score is essential for bridging loans. A high score can help reduce interest rates and increase approval chances.

3. Property Valuation:  The lender will conduct a valuation of your current property to assess its market value and ensure it can cover the bridging loan balance if needed.

4.   Loan-to-Value Ratio (LVR):  Most lenders cap LVR at 80%, meaning your loan amount can’t exceed 80% of the property’s value. Higher LVRs may attract additional fees.

5. Asset Requirements:  Lenders may look at your assets, such as savings, investment properties, or equity, to ensure financial stability during the bridging period.

Case Study: Homeownership through Bridging Loan

A Melbourne couple found their dream home but hadn’t yet sold their current property. They knew a bridging loan could help them secure the new home without waiting for the sale of their existing one.

With the loan approved, they were able to purchase the new property immediately. The bridging loan covered their combined loan balance, allowing them to manage the financial gap without stress.

Once their original property sold, they used the sale proceeds to pay off the bridging loan. After that, they transitioned smoothly to a standard home loan for their new home, achieving their goal of homeownership with minimal financial disruption.

Who Should Consider a Bridging Loan?

A bridging loan can be a valuable solution for certain homebuyers who need flexibility during a property transition. Here’s who should consider this type of financing:

• Homeowners Looking to Buy Before Selling
  If you’ve found your dream home but haven’t sold your current property yet, a short-term bridging loan can help cover the finance gap until you complete the sale.
• Those Needing Extra Time Between Properties
  A bridging loan provider can extend a bridging loan period of 6-12 months, allowing you to secure the new property and avoid rushing the sale of your existing home.
• Buyers Who Expect Cost Savings on Their Ongoing Loan
  If you anticipate cost savings by refinancing your current home loan into a new one, a bridging loan can help you transition smoothly without high minimum repayment burdens.
• Homeowners with Strong Financial Standing
  Meeting bridging loan requirements is easier for those with a stable ongoing loan, as lenders assess factors like loan rate, rate home loans, and maximum loan term when approving this type of financing.
• Those Seeking Guidance from a Loan Expert
  Working with a loan expert to use tools like a loan calculator can help determine the initial loan amount and assess eligibility for an eligible home loan, tailored to your specific needs.

Consider a bridging loan if you need short-term flexibility and meet the eligibility requirements for these unique loan products.

FAQs

Is a bridging loan hard to get?

A bridging loan isn’t too hard to get if you have strong equity in your existing property and a solid exit strategy. Lenders mainly assess your ability to repay once your current home sells.

How much deposit do you need for bridging finance?

Most lenders don’t require a traditional deposit for bridging finance, but you generally need at least 20% equity in your existing home. This equity acts as security for the loan.

Does Bank Australia do bridging loans?

Yes, Bank Australia offers bridging loans to help cover the gap between buying a new home and selling your current one. Their bridging finance options are subject to lending criteria and your financial situation.

What are the risks of a bridging loan?

The main risks include potential double interest payments if your home takes longer to sell and market fluctuations reducing your sale price. Delays in selling could also increase your overall loan costs.

How much do bridging loans cost?

Bridging loans can cost more due to higher interest rates and fees, with interest-only payments during the bridging period. Additional costs may include valuation fees, ongoing fees, and settlement charges depending on the lend

What is the minimum deposit for a bridging loan? 

Most Melbourne lenders require at least 20% equity in your existing property or combined security. The actual deposit requirement can vary based on your peak debt, property values, and lender policies.

Which banks do bridging loans in Melbourne? 

Major banks like Commonwealth Bank, National Australia Bank (NAB), Australia and New Zealand Banking (ANZ), and Westpac offer bridging loans, along with many non-bank lenders. Each lender has different policies and criteria for bridging finance.

How can mortgage brokers help with bridging loans?

Mortgage brokers compare lenders to find the best bridging loan rates and terms suited to your situation. They also guide you through the process, helping manage timelines, paperwork, and minimise costs.

Conclusion

Securing a bridging home loan can ease the financial strain of buying a new home while waiting to sell your current property. With expert guidance from loan specialists, you can navigate the bridging loan application process, manage monthly repayments, and understand additional costs like stamp duty, ensuring a smoother transition during the bridging period. 

Ready to explore your options? Reach out to LM Connect or call (03) 7020 1159 to get started!