Bridging Loan vs. Portable Loan
Many Australians move home or relocate within their typically 30-year loan period. There are many different options available when it’s time to sell and move home, including bridging loans and portable loans. But what are the differences, and which is the best relocation loan for you?
What is a bridging loan?
A bridging loan acts as short-term finance that allows you to purchase a new property without needing to sell your existing property beforehand. They can usually be arranged in a short period of time and require little documentation. A bridging loan is closed once your existing home is sold and sequentially becomes a chosen standard home loan.
While ideally, you may want to sell your existing home before you buy another, there are some occasions where this doesn’t go to plan. The following scenarios (and many more) can be helped by a bridging loan.
- Your current home may be taking a long time to sell, but you need to move regardless
- You may have found the perfect new home, but you don’t want to rush into selling your current property at the risk of a lower price
How does a bridging loan work?
A bridging loan can be arranged at short notice and without the need for lengthy paperwork required. Both the property you are selling and the property you are buying will be used as security towards bridging finance. The equity in your current home is released, paying for the deposit, stamp duty and other costs associated with buying a home.
To work out the size of your temporary bridging loan, your lender will add the value of your new home to your existing mortgage, and will then subtract your existing home’s likely sale price. Your lender may charge a valuation fee so always check with them first. Once your bridging loan is set up, you will have an ‘ongoing balance’ or ‘end debt’. Both properties will be used as security by your lender.
End Debt – the remaining loan balance, once your existing home has been sold and its proceeds have repaid the bridging loan.
For the short-term duration of your bridging loan, you will usually make principal and interest repayments on your existing home loan, and interest-only repayments on your new home (this total is known as peak debt). When your existing home is sold, your repayments will switch to the principal and interest of your new home, plus the compounded interest on your bridging loan. Interest is calculated monthly on a bridging loan, meaning the longer it takes to sell your existing property, the more interest you will accrue.
Peak Debt – the purchase price of your new property as well as your current mortgage.
Open and Closed Bridging Options
Bridging loans fall into two categories – open and closed.
A closed bridging loan is one based on a pre-determined date that your property will be sold by, where you pay the remaining principal of the bridging loan. This option suits those who have already agreed to sale terms of your property. Lenders are exposed to less risk with this loan as the sale is unlikely to fall through after the exchange.
An open bridging loan differs in that the sale of the property is yet to be finalised – it may not even be on the market. Those who go down this route usually have found their perfect property and want to snap it up, but they haven’t sold their existing home. More equity is generally needed for an open loan, as it poses more risk to the lender. An agreed backup plan may also be necessary in case the sale of your house doesn’t go as planned.
Bridging Loan Types
There are normally two types of bridging loans which are offered based on the equity in your current home.
- Both properties are used as security
- You aim to sell your existing home within 6-12 months
- When your existing home is sold, its proceeds are put back into your overall debt
- No repayments during the agreed bridging period, with normal repayments on existing home
- When your current home sells, the loan is paid out and any extra debt is negotiated
A bridging loan will usually be for a period of 6 months, giving you 6 months to sell your current home after the purchase of your new property. If you are building a new home, this time frame may extend to 12 months.
With an end loan, you can select a home loan from your lender to use for your new property once the relocation period is complete.
Without an end loan, interest is capitalised throughout the relocation period, and your loan will be paid in full on the sale completion of your existing property.
How do I get a bridging loan?
Banks and Lenders understand the difficulties paying two mortgages incurs, so a bridging loan is there to lessen the financial burden. A bridging loan will be approved based on the following:
- Whether you can pay the bridging loan back with the sale of your existing home
- Whether you can make interest-only repayments on your new home loan as well as principal and interest on your current home (you are able to make principal payments on your new home as well if your finances will stretch)
Lending Specialists can calculate what your interest-only repayments will be, and help you budget for principal payments and any additional costs and fees incurred.
Risks and rewards of bridging loans
- Buy time to sell your home at the right price
- Stay in your home while your new home is constructed
- Avoid moving into a temporary rental property
- Not everyone qualifies for a bridging loan. Speak to our Lending Specialists to see if you can
- There is a 6 or 12-month time limit on selling your home
- Higher risk than conventional financing, so the interest rates and fees are usually higher
What is a loan portability?
It’s likely you will move house at some stage during your loan term, so mortgage portability can come in handy when you do. A portable home loan does what its name suggests – enabling you to take your mortgage with you when you move house!
Instead of bridging the finance gap between two home loans, you are simply transferring your home loan to another property, which can save you time, money, and unnecessary stress.
How does loan portability work?
A portable home loan is a feature that your current home loan may include. It is not a loan in itself like the bridging loan. You may be surprised to find that your existing home loan has a portable home loan feature, as many lenders including Mortgage House include loan portability as one of their handy features.
If your current loan does not include loan portability, it may be something to request when you refinance to a new loan, to save you time and money in the future.
With a loan portability feature, you can wave goodbye to the costs associated with refinancing. Exit and establishment fees are applicable each time you move, so using the loan portability can save you money.
You may need to increase your loan amount, and as long as this amount is within what your current loan allows, then you can do so. If it exceeds your loan limit then you may need to refinance to a different loan, but we can help you with that too.
How do I get a portable home loan feature?
Many of our loans come with the portable home loan feature. You can check your terms and conditions to see what features are included or speak with your Lending Specialist. It’s worth discussing exactly what you can and can’t do with your portable loan feature, as each lender may have different conditions.
There is a lot less to do with a portable home loan, as you are simply moving your loan from one home to the other – no need to change lenders, no terms and conditions changes, repayments movement, or lengthy paperwork.
Risks and rewards of loan portability
- No costs associated with refinancing to a new loan
- No spending hours trawling through new home loans
- No hassle of changing all details – everything stays the same except your address
- Stay with the lender you’re already comfortable with
- If you want to increase the amount of your loan outside of your home loan agreement, you may need to apply for another loan
- There may be fees associated with transferring a loan
- Many lenders require that settlement and exchange for both homes must occur on the same day, so it is best to check with your lender
What loan option is best for me when I move?
This depends entirely on whether your current loan includes loan portability, and whether you are in a position to sell your existing home before you buy your new one. Whatever your situation, it is best to speak to your Lending Specialist who will cover every option you have before you make a decision.
Bridging loans can be great for those ready to make the big move, and portable loans are equally useful, letting you transfer your entire mortgage package to your new home without changing the lender. While relocating or moving home can be a logistical nightmare, the Mortgage House team can simplify the process and reduce your stress. Speak to your Lending Specialist to find out more.
At Mortgage House, we are no stranger to the homeowner’s journey. It’s a long (but rewarding) one.
If you’re thinking of moving or relocating, you can contact us for the best options when it comes to moving your mortgage and saving money.