Bridging Finance – The Definitive New Zealand Guide for Anyone Buying a Home without Selling their Existing Home
Whatever your needs for a bridging loan, our guide outlines the costs, lenders, pros, cons and must-know considerations
Updated 6 April 2021
Know This First: While bridging finance interest rates are, in almost all situations, higher than standard homes loans, there is no need to accept the first offer you receive. There are a number of banks and alternative lenders who offer bridging finance, and there's no need to panic or rush a decision as finance can usually be arranged relatively quickly.
If you're unfamiliar with how bridging loans work, we suggest reading this guide in detail - it has been published to help you understand how this unique financing works. It also walks you through two typical examples and outlines the pros, cons and alternatives available. Our information is general - for specific guidance, you may also want to contact a mortgage broker or lender who can advise on your situation. By doing so, you are likely to save time, money and lower your anxiety around your current situation.
Our guide to bridging finance covers:
Important: With house prices at record highs, bridging loans can be a costly financial solution. With Auckland house prices north of $1,200,000 and New Zealand averaging $815,000, covering two mortgages for a short period of time can stretch the finances of even high-earning households. For this reason, it's important to fully understand the total costs and ongoing obligations of bridging finance - while bridging finance is not designed to be a long-term situation, the costs it incurs can have long-term effects.
If you're unfamiliar with how bridging loans work, we suggest reading this guide in detail - it has been published to help you understand how this unique financing works. It also walks you through two typical examples and outlines the pros, cons and alternatives available. Our information is general - for specific guidance, you may also want to contact a mortgage broker or lender who can advise on your situation. By doing so, you are likely to save time, money and lower your anxiety around your current situation.
Our guide to bridging finance covers:
- What is a Bridging Loan?
- How Does Bridging Finance Work?
- How to Qualify for a Bridging Loan
- What to Consider Before Taking Bridging Finance
- Lenders Offering Bridging Finance
- Bridging Finance Frequently Asked Questions
Important: With house prices at record highs, bridging loans can be a costly financial solution. With Auckland house prices north of $1,200,000 and New Zealand averaging $815,000, covering two mortgages for a short period of time can stretch the finances of even high-earning households. For this reason, it's important to fully understand the total costs and ongoing obligations of bridging finance - while bridging finance is not designed to be a long-term situation, the costs it incurs can have long-term effects.
What is a Bridging Loan?
If you've ever thought about buying a new house before selling your existing home, there is one major problem - owning two properties and once (and having to finance both of them at the same time). A bridging loan helps home buyers pay for their new house while their existing house sits for sale. Unless you're mortgage-free and/or buying the new home in cash, most people need a bridging loan to buy another home if they cannot sell their existing property.
A bridging loan helps act as the 'bridge' between buying your new house and selling your existing house. In other words, it's temporary financing to bridge the gap until you sell your home.
A bridging loan helps act as the 'bridge' between buying your new house and selling your existing house. In other words, it's temporary financing to bridge the gap until you sell your home.
How much does a bridging loan cost?
Mortgages for any household are a significant expense, so taking on a bridging loan, which can double your mortgage outgoings, is a decision that should not be underestimated.
Bridging loans are based on a lender's floating rate, plus a premium (such as 1% or 2% p.a. above the floating/variable rate). Bridging loans are almost always on interest-only terms. Once your original property sells, the mortgage balance owed is repaid, the remaining balance switches from floating to fixed.
Bridging finance costs are best explained by an example with numbers:
Bridging loans are based on a lender's floating rate, plus a premium (such as 1% or 2% p.a. above the floating/variable rate). Bridging loans are almost always on interest-only terms. Once your original property sells, the mortgage balance owed is repaid, the remaining balance switches from floating to fixed.
Bridging finance costs are best explained by an example with numbers:
- Aroha and Matthew have an existing interest and principal repayment mortgage that costs $500 a week to service.
- On 1 April, they put their existing home on the market, enter into an unconditional offer on a new home and take possession of the home on 1 June.
- Their home doesn't sell by the end of May, so Aroha and Matthew arrange bridging finance. Their new home costs $800,000, and the best offer they receive is 4.95% (3.95% variable + a 1.00% bridging finance premium). This costs $762 per week to service per our interest-only mortgage calculator.
- The home finally goes unconditional on 1 July, with a settlement date of 31 August. Upon settlement, the proceeds of the sale repay the existing mortgage, legal and real estate costs, and the remainder is applied to the bridging loan (which switches to a fixed-rate home loan.
- Aroha and Matthew pay a total of $9,900 ($762 X 13 weeks) for their bridging finance interest repayments.
How Does Bridging Finance Work?
The type of bridging loan you get depends on your circumstances. In both circumstances, the bridging finance is used to pay for your new home - the lower the interest rate, the cheaper the bridging finance is.
Closed Bridging Finance
If you've sold your existing home and bought a new one, but the timing of the closings don't coincide, you'll need a closed bridge loan. This loan is a bridge between your two closing dates which are already known. It provides the financing to buy your new home while you wait for your existing home to close. You can borrow funds under a closed bridging loan for a maximum of 12 months.
Open Bridging Finance
If you haven't sold your existing home but are ready to buy a new home, you need an open bridge loan. This type of loan is riskier for lenders because it doesn't provide a definite date that you'll sell your current property and pay off the loan. An open bridge loan usually has tougher requirements and a higher interest rate to make up for the lender's risk.
Know This: No matter which loan you need, how they work is the same:
Costs: How you're charged depends on the type of loan and the lender. Some lenders charge interest only while you are in 'limbo', and others require full payment on the total loan amount when the sale of your existing home is settled.
Bridging Loans - A Typical Example
Know This: No matter which loan you need, how they work is the same:
- The lender finances the price of the new property
- The lender also takes over the existing mortgage on your current property
- By subtracting the intended amount you'll receive for your existing property, you get the ongoing balance
Costs: How you're charged depends on the type of loan and the lender. Some lenders charge interest only while you are in 'limbo', and others require full payment on the total loan amount when the sale of your existing home is settled.
Bridging Loans - A Typical Example
- Mike and Sarah want to move home with their children. They see an ideal family home and make an offer in December, which is accepted.
- They promptly list their existing home with a real estate agent. Their current property is valued at $1,000,000, and their new home is $1,500,000.
- Both Mike and Sarah wanted to move before the start of the school year (February) to minimise disruption for their children.
- They settle the new home in January (after a slow Christmas period of house sales) using a bridging loan. The interest rate is 1% above their lender's floating rate, which comes to a total of 4.95% p.a. The cost per week for the interest-only payment is around $1,435. The term of the bridging loan is six months.
- In March, after a flat summer of house sales, Mike and Sarah's house finally sells for $1,115,000. Net of agent costs, legal fees, and repaying the mortgage, Mike and Sarah receive around $500,000 to put towards their new mortgage.
- They promptly contact their mortgage broker, who arranges for the bridging finance to switch to a fixed-rate home loan; Mike and Sarah sign up for a 25-year mortgage at 2.75% p.a. with a $1,000,000 balance.
- In summary, Mike and Sarah took the risk that their home would sell in six months, but they also paid over $10,000 in bridging loan interest costs while their existing house sat on the market. Had the home not sold in those six months, the ongoing bridging loan interest costs would continue to be charged (and they may have needed to extend the terms). This example demonstrates that bridging finance is not without its risks and costs.
How to Qualify for a Bridging Loan
Since bridge financing is so risky, lenders often have tougher requirements to ensure you can handle the stress of the unknown. In addition to proving you can afford the loan both now and after you sell your current home, most lenders look for:
- Offers on your home - If you have an unconditional offer on your home (but for a date after you settle your new home purchase), lenders have certainty around the amount of money and amount of time they need to provide bridging finance for. These details lower the lender's risk and, in many cases, the total costs of bridging finance.
- Financial stability and affordability – Banks want to know you can cover all of your financial responsibilities, including settling the total loan amount should your sale fall through. Because paying two mortgages simultaneously is almost impossible in the long term, lenders assess your risk profile in detail. This includes looking at your income, current mortgage obligations, personal debts etc.
- Sufficient savings - bridging loans mean you'll need to service two loans, so lenders will ideally like to see at least $20,000 to $40,000 in savings to meet these obligations.
- A realistic sales price – Selling your home is an emotional process that may make you over-inflate your sales price. A realistic valuation will help you and the lender know how much the home is worth.
- Money to put down – Each lender has a different LVR allowance, but most require 20% equity in the new home you buy.
- Proof you can sell the home within 6 – 12 months – Lenders want evidence that you will and can sell the home within 6 – 12 months. For example, the home must be on the market, in excellent condition (i.e. no damage or structural/repairs awaiting) and be priced competitively or in a residential area with high demand.
- Proof that you have an alternative plan – Life doesn't always work out as we planned, and lenders want to know you have a backup plan should your original plans fall through.
Pros and Cons of Bridging Loans
Pros
Cons
- You can make a move on the housing market fast - this means you have the same (or similar) buying buyer as property investors and first-time buyers (i.e. no ties or limitations).
- You can act on a whim, buying your dream home if it pops up unexpectedly and you haven't sold your existing home.
- You may only have to pay interest on the new loan. Every loan is different but may offer interest-only repayments rather than interest and capital repayments.
- You can avoid renting your home while you wait for it to be sold. This isn't common given New Zealand intense property market, but it is worth noting that some people do this to meet mortgage repayment obligations.
Cons
- Bridge financing is expensive. You're covering the mortgage on your existing home and a new home, so it's effectively a 'double mortgage' with a comparatively higher interest rate. As per Kiwibank, interest rates on their bridging loans are "1% higher than our standard variable rate". Other lends charge similar (or higher) amounts.
- Most bridge financing loans have variable interest rates, making it harder to budget for your expenses and save. If interest rates go up, so do your mortgage costs. This can be very problematic as you'll be paying two mortgages at the same time.
- If your home doesn't sell within the allotted time, your interest rates will likely increase.
- It's risky to 'bank' on the fact that you'll sell your property in time; hence the fees and higher interest rates compared to standard home loan offers.
- Your current home may sell for less than what you planned, which means you'll have to take on more mortgage debt to cover the new home you buy.
Alternatives to Bridging Loans
If taking out bridging finance seems too risky for your financial situation, there are ways around it:
- Contingency Agreements – You can make the purchase of your new home contingent upon the sale of your existing home. This may limit your options as not all sellers accept contingencies, but it's worth asking. If you are granted the contingency and don't sell your home in time, you can back out of the contract without penalty.
- Ask for a longer settlement period – Some sellers don't need to move fast and will grant you a longer settlement period. This gives you more time to sell your home and get your financing to buy the new home.
- Sell your home first and then make an offer on a new home - This is where you decide you want to move but want to do so with money in the bank and without the pressure of selling your home before you move. In a pre-housing crisis New Zealand, this was done without too much hassle. However, in current markets, there is a risk that you'll be repeatedly outbid, the market will overheat and become affordable, and/or you won't be able to find rental accommodation in the short term. Selling first and housing-hunting second is not without risks.
What to Consider Before Taking Bridging Finance
A bridge loan seems like the 'magic wand' you need to make buying and selling homes easier, but it's not always the magic answer. Before you take one, ask yourself:
1. What's the average time on the market in my area?
If you aren't comfortable that you'll be able to sell your home fast, you may want to refrain from bridging finance. Look at the days on the market – if it's too much, then a bridging loan may be too risky and too expensive. However, if homes are selling fast in your area, then it may be worth the risk. In any instance, never proceed without fully understanding the costs and make sure you are aware of all the obligations.
2. What will you do if your home sells for less than you expected?
If you are properly prepared and worked with an experienced valuer, you should be on track to get what you expected for your home, but that's not always the case. If you have a shortfall, your new mortgage costs will be higher - even a $50,000 shortfall means $55/week extra for 25 years at a 3% p.a. interest rate. Before proceeding, do you have a backup plan if your home sells for less?
3. What will you do if your home takes longer to sell?
Even the most carefully laid plans can go awry. If your home takes longer than you anticipated to sell, it could leave you with debts that are much larger than you anticipated.
4. Can I afford the bridging finance?
Bridging loans are expensive - you pay a higher interest rate, and you have to keep up with your existing home's mortgage at the same time. Make sure you have the financing to back you up should this happen - it needs to be affordable and realistic. While eventually, your home will sell and give you a cash injection and repay your existing mortgage, there may be some financially difficult weeks in the short term.
1. What's the average time on the market in my area?
If you aren't comfortable that you'll be able to sell your home fast, you may want to refrain from bridging finance. Look at the days on the market – if it's too much, then a bridging loan may be too risky and too expensive. However, if homes are selling fast in your area, then it may be worth the risk. In any instance, never proceed without fully understanding the costs and make sure you are aware of all the obligations.
2. What will you do if your home sells for less than you expected?
If you are properly prepared and worked with an experienced valuer, you should be on track to get what you expected for your home, but that's not always the case. If you have a shortfall, your new mortgage costs will be higher - even a $50,000 shortfall means $55/week extra for 25 years at a 3% p.a. interest rate. Before proceeding, do you have a backup plan if your home sells for less?
3. What will you do if your home takes longer to sell?
Even the most carefully laid plans can go awry. If your home takes longer than you anticipated to sell, it could leave you with debts that are much larger than you anticipated.
4. Can I afford the bridging finance?
Bridging loans are expensive - you pay a higher interest rate, and you have to keep up with your existing home's mortgage at the same time. Make sure you have the financing to back you up should this happen - it needs to be affordable and realistic. While eventually, your home will sell and give you a cash injection and repay your existing mortgage, there may be some financially difficult weeks in the short term.
Lenders Offering Bridging Finance
There are reports in the media that bridging finance ranges from 8 to 10 percent, and that often the interest payments are capitalised. This is not always the case - many lenders are offering interest-only arrangements which are more affordable (although you will need to make the repayments until your home sells).
Know This: The costs of bridging are not widely publicised, but some lenders are more transparent
While most lenders don't publicise the cost of bridging loans, we found that Kiwibank and TSB do - both charge 1% p.a. above their standard loan rates. You may also need to pay loan fees on top - your lender or mortgage broker will have all the details.
Currently, many lenders offer bridging finance, including:
Know This: The costs of bridging are not widely publicised, but some lenders are more transparent
While most lenders don't publicise the cost of bridging loans, we found that Kiwibank and TSB do - both charge 1% p.a. above their standard loan rates. You may also need to pay loan fees on top - your lender or mortgage broker will have all the details.
Currently, many lenders offer bridging finance, including:
Bridging Finance Frequently Asked Questions
Bridging loans don't need to be stressful or overly expensive - taking the time to prepare and make a strong application will put you in the best position. Our frequently asked questions below anticipate some of these concerns, but a mortgage broker or lending manager is best placed to guide you on bridging loans specific to your financial situation.
How much does a bridging loan cost?
Bridging loans aren't cheap. On top of the normal interest rates, you'll likely pay a loan setup fee of at least 1 – 2% of the loan amount. This is in addition to the higher interest rates most bridging loans charge.
Is it hard to qualify for a bridge loan?
It can be hard to qualify for a bridge loan because of the high risk they pose. Ideally, you should have great credit and a low debt-to-income ratio to qualify.
How much equity do you need for a bridge loan?
The exact amount of equity you need varies by lender. Some will require as little as 20% of the peak loan amount or the amount of your current loan and the new loan combined, but it's not unheard of for lenders to require at least 50% equity.
Is a bridge loan worth it?
If you're in a bind and you have both the new home ready to buy and a buyer for your existing home, it can be worth it. But, if you're buying a new home because you found one but haven't done any work to sell your existing home, it could be too risky.
Do bridging loans have interest-only terms?
Yes - this is standard for most lenders. You'll usually keep making the full repayments on your current mortgage and interest-only payments on the new loan just until the bridge loan expires. After that, your loan becomes a standard mortgage.
Is a bridging loan stressful?
The idea of a bridging loan is to alleviate the stress of buying a new home before selling your existing home, but sometimes the bridge loan can be stressful too. It adds another layer of financial responsibility, and if your current home doesn't sell in a reasonable time, it could leave you in quite a bind financially.
