Bridging finance and a break fee on a fixed-rate loan
A family has sold its existing home for $850,000, unconditional, with settlement in eight weeks. It has bought a new home for $1,150,000, with settlement in four weeks, and needs $300,000 of bridging finance for four weeks, with a two-week buffer. The existing fixed-rate mortgage of $420,000 has 18 months to run; the lender quotes a break fee of $11,800 to repay it early. The lender offers a six-month interest-only bridging facility at 8.90%, plus a $1,200 establishment fee. The family's combined income is $165,000; it has $25,000 in savings and two dependent children. The sale contract for the old home is conditional on the buyer's finance for another five working days. The lender's credit policy allows bridging up to 80% of the end debt but requires a clear exit strategy.
1. Assess the suitability and affordability risks of the bridging facility.
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Bridging finance is suitable only if there is a clear, documented exit. The exit depends on the old home settling in eight weeks, but the buyer's finance condition is still open for five working days. Until that condition is satisfied, the sale is not unconditional and the bridge is not safe. The cost is significant: $300,000 at 8.90% interest-only is about $26,700 a year, or $2,225 a month, before the $1,200 fee and the existing mortgage. Interest-only means no principal reduction, so the debt does not fall during the bridge. The family's $25,000 savings are a thin buffer if settlement is delayed. The lender should stress-test a delay of, say, eight to twelve weeks and confirm how the family would cover the extra interest and any penalty. If the old home sale fails, the family may have to service both the bridge and the new mortgage, which their income may not support. The lender should require the sale to become unconditional, a satisfactory valuation of both properties, and a documented exit strategy before drawdown.
2. What must the lender disclose about the break fee and the bridging fees?
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The $11,800 break fee is an early repayment cost under the existing fixed-rate loan. The lender must disclose it clearly before the borrower commits, including how it is calculated, when it applies and whether it changes if settlement moves. Under the CCCFA, credit fees must be disclosed and must not be unreasonable; the lender should be able to show the basis for the $11,800 figure. The bridging facility has a $1,200 establishment fee and an 8.90% interest rate; the lender should disclose the total cost of credit, the interest-only nature of the facility, the term, and what happens at the end of the six months if the sale has not settled. The family should see a comparison of continuing the existing fixed loan versus breaking it, because the break fee may be larger than the interest saved. The lender should also explain that the break fee may be added to the loan or paid from sale proceeds, and obtain written acceptance. Disclosure must be in plain language and given before the borrower enters the contract.
3. What alternative structures or conditions should the lender consider?
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The lender should first see whether the existing fixed loan can be ported to the new home, which may avoid or reduce the break fee. It could also consider a shorter bridge, a lower bridge amount, or a facility that is repaid from the sale proceeds with a lender-approved undertaking. If the family has $25,000 savings, using part of it to reduce the bridge lowers interest and risk. The lender should require the old home sale to be unconditional before drawdown, or at least before the bridge is advanced; a five-working-day finance condition is a material risk. It should obtain a valuation of the new home and confirm insurance. A condition requiring the borrowers to maintain a buffer for three months' bridge interest would be prudent. The lender should document why bridging is better than selling and renting, and should not approve merely because the end debt looks acceptable on paper. If the sale fails, the lender needs a fallback plan, such as a longer-term loan subject to servicing.