What is bridging finance?

Just imagine: You've finally found that perfect home you've been looking for. It's in a great area, the house fits your specifications and the market's in such a place that it's affordable enough for you. What's the catch? Well, you already own a house.

While there's nothing wrong with owning two homes, that may not be an option that's available to every home buyer. You're not quite at the point where you're ready to sell, but you want to get this new property while the getting's good. What can you do?

Get a bridging loan

A bridging loan is not your average home loan. Bridging loans are for those who want to buy or build a new home before they've gotten the existing one off their hands – because in life, things don't always align as perfectly as they do in our plans.

How does it work? 

Bridging loans come in two types. You can either get a single loan for both properties, in which you get a bridging period of 6 months to a year to turn over the property you currently own, during which you'll solely be paying off interest. The sale of your first house will help pay off your total debt. What's left of this debt will be turned into repayments, or a whole new loan.

The other option is a separate loan for your new home. During the bridging period, rather than dealing with repayments, you will continue to pay off your first home loan while interest builds up. According to the Australian Securities and Investments Commission, under these conditions, once you've sold your home and paid down the overall debt, the new debt will have to be renegotiated. 

What are the risks? 

While it may seem like the solution for you, it's important to be aware of the risks involved in this type of home loan refinancing.

For example, if you overestimate the value of your current home, then you may end up unable to pay the debt that accumulates during your bridging period. This is on top of all the usual fees and the stamp duty, which can be in the tens of thousands depending on the cost of your new home. 

Also, keep in mind you're holding two mortgages in the bridging period while potentially paying neither off. The longer it takes to sell your first home, the bigger your later debt will be. So think carefully about this finance option!