Whether upsizing, downsizing or relocating, most people choose to sell their existing house first and then use the equity from this sale to complete settlement for their new home. However, this isn’t always possible and in booming property markets with limited stock (like many around Australia), home buyers often find themselves needing to settle on their next property before selling or settling on their current property.
If you find yourself in this situation, you may not have the money available to complete settlement on the new property in time and risk incurring settlement penalties or potentially losing the deposit you’ve already paid. This is where bridging finance, or a ‘bridge loan’ as it’s also known, can help because it offers home buyers a short-term line of credit that allows them to settle on their new home before the funds from their existing home become available.
What is bridging finance (aka bridge loan)?
Bridging loans or bridge loans are financial products offered by many lenders that help cover the cost of buying your new home while you are selling or waiting to settle on your existing property. It’s worth noting that there will be different conditions depending on the lender, but it involves a lender taking both properties as security and providing financing to cover the outstanding balance on your existing mortgage and the cost of the new property. Generally, you have between 6 to 12 months in which to sell your existing property and put the net proceeds of this sale towards reducing the size of the loan and paying the balance off as a regular mortgage product.
There are advantages and disadvantages of using bridging loans, so it pays to understand exactly what kind of financial commitment you’re making, and whether you can realistically afford it. We would recommend doing thorough research and talking to your lender to help avoid financial stress.
What are the advantages of bridging finance?
- You can buy your new home quickly. Taking out a bridge loan means you’re not limited to buying properties that are on the market after you’ve sold your current home.
- Taking on a bridging loan means you can avoid the stress of having to sell quickly, and by doing so, could potentially get you a better price on your house by being able to agree to terms that are favourable to the purchaser.
- It will also allow you to dodge storage and temporary rental property costs.
What are the disadvantages of bridging finance?
- Not everyone qualifies for bridging finance. The equity in your current property needs to be quite substantial to ensure that after the financing for the new property is advanced, there is still a sufficient level of equity across both properties. Or in other words, the combined loan to values ratio across both properties are at levels acceptable to the lender.
- The lender may charge fees to value your existing and new property as well as other application costs.
- In many cases, bridging finance interest rates are higher than standard loan rates.
- You’ll have the stress of servicing a higher debt because you’ll be paying off two mortgages. While some bridging finance products allow you to ‘freeze’ repayments, so you only have to repay your current mortgage, the bridging loan interest is usually accrued on a monthly basis and added to the total loan amount. This means the longer it takes to sell your existing property, the bigger the loan debt and interest on it becomes. And if you don’t sell within the terms of your bridging loan, or don’t achieve your target sale price, then things could spiral out of control quickly.
- A bridging loan may result in you having to sell your house for a lower price, if you need to sell within a certain time period, or need the money to meet the loan obligations. If you don’t sell your house within the time period, the lender could foreclose on the property keeping in mind that if there has been a substantial downturn in the market, they can also foreclose on your new property.
- If your current lender doesn’t offer bridging finance, you might need to switch to a lender that does offer it, and your current lender might charge break fees in the case of fixed rate home loans.
Is there an alternative option to a bridging loan?
Taking on the risks of a bridging loan or letting that dream house slip away is a difficult dilemma faced by many hopeful homeowners. However, it’s one Sellable can help people avoid.
At Sellable, we can give you a guaranteed price for your current property, based on a fair and independent valuation, so you can go shopping with confidence. Once you accept our offer, we will organise a simultaneous settlement. This means we can pay you when you settle on your new purchase, and you can move out of your old house in the morning and into your new home in afternoon. And if your old home sells for more than the guaranteed price, you’ll receive 75 percent of any additional upside — a handy bonus that could be used to help you settle into your new home.
Disclaimer: The information provided in this article is of a general nature only. It is intended to be factual and should not be used as financial advise. Please consult your financial adviser to take into account your individual financial circumstances.