Bridging dreams

When it comes to the property market, patience is a virtue. Vendors have witnessed rapid ebbs and flows of property values in the 2020s so far – with change coming thick and fast.

After the property values skyrocketed in 2020 and 2021 during the peak of COVID-19, rising by around 30 per cent, housing values subsequently dropped by approximately 10 per cent in eight consecutive months once rising interest rates began to take effect.

But since property values hit their lowest point in January 2023, they have almost entirely rebounded, with month-on-month increases.

While higher interest rates have impacted borrowers’ serviceability due to rising property prices, the property market has remained relatively robust.

For instance, the median number of days a property spends on the market in Australia decreased from 36 days in January 2023 to 30 days in September, according to CoreLogic.

Head of research at CoreLogic Australia, Eliza Owen, noted that “the market has been in recovery mode” and a sense of urgency in purchases has returned.

Despite properties becoming easier to sell and listings beginning to increase, properties are still relatively scarce due to low supply.

As such, when a buyer finds a dream home, snapping it up quickly is important.

This is where bridging loans come into play, helping borrowers bridge the gap between buying the new property and receiving settlement funds from the old one.

Whether upsizing, downsizing or simply making a change, bridging loans can save time, money, stress and hassle when dealing with this dilemma.

Mortgage Choice Epping broker Richard Brown told The Adviser that he had recently helped three clients secure bridging loans due to the “tightly held markets” in Epping, where properties are not frequently available.

“Properties aren’t coming up all that often”, he said, highlighting that clients need to be able to “move reasonably quickly” and bridging loans provide that option.

As such, bridging loans reduce the pressure to sell their homes hastily.

Similarly, Alycia Inglis, broker and founder of Stoneturn, explained that many homeowners have been choosing to buy their new home before selling their old one because they’re “waiting for the right property to come up before deciding to proceed [with a sale]”.

“People don’t want to sell first, and then have to rent as they’ve not found their dream home. Particularly in this market, where rents are high and rental properties are hard to find (particularly for houses), it’s much easier to sit and wait; buy first and then sell,” Ms Inglis said.

Bridging loans can be an excellent solution to those buying a property for lifestyle changes, whether it’s because they’re growing a family, moving for job opportunities or wanting to downsize in retirement.

However, she noted that bridging loans can be quite technical and it’s essential for brokers to spend time checking lender policies in detail and cross-checking servicing requirements “to give borrowers the right advice with these products”.

“For most people, it’s about having the money to move from one home to another before the existing property sells without needing to take out a new mortgage,” Ms Inglis said.

However, bridging loans come with some risks, as borrowers hold a higher amount of debt for a short period unless the bridging loan is paid out.

How does it work?

A bridging loan is typically an interest-only, short-term loan, usually taken out for a period of two weeks to three years, pending the arrangement of larger or longer-term financing.

The lender usually takes over the mortgage on the existing property and finances the purchase of the new property.

This “peak debt” includes the balance of the existing loan, the contract purchase price of the new home and any purchase costs such as stamp duty, legal fees and lender fees.

The minimum repayments on a bridging loan are usually calculated on an interest-only basis and, in many cases, this interest may be capitalised until the existing home is sold.

Once the property is sold, the net proceeds are used to reduce the peak debt, with the remaining debt becoming the end debt, repaid as a standard mortgage product.

Mortgage Choice Epping’s Mr Brown noted, however, that lenders can assess borrowers differently, with some focusing on the peak debt and others on the end debt, while some consider both.

For borrowers with high loan-to-value ratios (LVRs) who find it difficult to refinance due to serviceability constraints, selling and using a bridging loan can be a viable option, given bridging loans are assessed on an interest-only basis making serviceability easier, Mr Brown added.

All major banks offer bridging loan products for up to 12 months and highlight that borrowers should be “confident” that their property will sell within this time frame to avoid default risks.

Some, such as the Commonwealth Bank (CBA), actually step in to assist with the sale of the property, if the property cannot be sold within the 12-month period (which may be considered a “default”).

Smaller banks and non-bank lenders also offer various bridging loan products, such as Bridgit, Clinch and Funding.

Which markets are best suited for bridging loans at the moment?

Property markets vary significantly, with Melbourne, Sydney and Brisbane experiencing a decrease in the time it takes for properties to sell, at 28, 29 and 22 days, respectively. This can largely be attributed to rising property values amid tight supply.

In contrast, Darwin, Hobart and the ACT have longer days on market, primarily due to price declines, at 59, 44 and 42 days, respectively (according to CoreLogic).

Sarcha Sagisaka, founder at Success Finance Solutions in Perth, told The Adviser that bridging loans haven’t been particularly popular in Perth either at the moment because clients can easily sell their homes.

In fact, Perth’s median days on the market have fallen to 13 days and have stayed below the 20-day mark over the past two years.

In the lower price brackets, homes are often sold online on the day they are listed, Ms Sagisaka noted.

“Once [a buyer] finds and secures the property they like in the higher price bracket, they can comfortably pop their lower price bracket home on the market knowing it will be sold by the weekend,” she said.

However, for cases where properties do not sell as quickly, buyers can easily obtain a no-end-debt bridging loan.

There are some lenders that allow borrowers to hold their current loan open against a term deposit for a short period, effectively filling the gap in misaligned settlement dates, she added.

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Last Updated: 09 November 2023

Published: 10 November 2023