Finance to buy your new home before the old one is sold
Many, if not most, homeowners find their new dream home before they are able to sell their current one. Unfortunately, finding that home and finding the funds to purchase it are two very different things.
In a perfect scenario, we would all be able to precisely match up the dates that we sell our existing home and purchase a new one, aligning the end of one mortgage with the start of another. But reality, with its price fluctuations, varying auction clearance rates and general unpredictability, often intrudes to make the transition between properties an exceedingly stressful one.
Helping to “bridge” the timing gap are bridging loans.
What are bridging loans?
A bridging loan is when you require finance to purchase a second property with the intention of selling the existing one. A bridging loan is typically an interest only payment home loan with a limited loan term. The extent of the bridging loan is calculated on the equity in your current property.
It is an additional home loan that you take out on top of your current home loan until the property is sold and the loan can be closed. This means during the bridging period you have two loans and both loans are being charged interest.
Bridging finance is not for everyone. It pays to have built up at least 50% of your existing home’s value in equity before you attempt a bridging loan. Otherwise, you may end up paying a prohibitive amount of interest.
How do bridging loans work?
The size of your commitment on a bridging loan is calculated by adding the value of your new home to the outstanding mortgage on your existing home and then subtracting its likely sale price. What’s left is referred to as your “ongoing balance” or end debt, which represents the principal of your bridging loan.
Bridging loans are interest-only, so during a bridging period of six months interest will be compounded monthly on your ongoing balance at the standard variable rate. The interest bill will then be added to the ongoing balance when you sell your house. This amount becomes the mortgage on the new property.
While the interest rates on bridging loans are now comparable with ordinary mortgages, you will still essentially be carrying two mortgages. Additionally, you won’t actually be paying anything off during the bridging period. The longer you take to sell your existing home, the higher your interest bill, and hence your new mortgage, will be.
What are the risks?
Before taking any steps toward a bridging arrangement, it is essential to do your sums to make sure you can afford a bridging arrangement in the first place. If so, there is still a critical question that needs to be addressed.
“How long will you be able to look after two loans for?” One of the biggest issues in bridging finance is not to overestimate the likely sale price of the existing property, which could quite possibly fall short of the amount required to pay out the bridging loan.
As with all residential property transactions, it is important not to let your emotions get in the way – a challenge to many homeowners who see their home in a considerably more flattering way than most buyers will is to be prepared “to meet the market.”
Bridging loans are still subject to the usual array of mortgage-related costs.
However, the greatest risk is that your property will not sell within the bridging period. If structured correctly and based upon realistic timeframes and price estimates, bridging finance can ease the pressure of matching up settlement dates and give you time to sell your existing property while securing your new one.
Although there are risks, they can be mitigated. Give us a call on 1300 252 088 to discuss your options and strategies.