Due to the recent coronavirus pandemic & economic uncertainty, we recommend you sell your home before buying a new home. If you buy your new home first & the market falls before you sell your existing property then you’re at risk.
Purchasing a new home should be a fairly straightforward process: you find an amazing piece of real estate, you sell your old property and then you move into your new digs.
Of course, in the real world, things don’t always work out that way and you may find that you’ve found your dream home before you’ve found a buyer for your old one.
Depending on your location, it can sometimes take weeks or even months to find a buyer. On top of that, trying to sell your existing home and buy a new one simultaneously can get a little complicated.
The good news is that there is a solution. A bridging loan allows you to buy your new home before finding a buyer for your existing property.
There are 5 awesome things that you absolutely have to know about bridging loans but first, how does it work?
What is a bridging loan?
Think of a bridging loan as “bridging” the finance gap. You need to buy that $600,000 but you don’t have the money because you haven’t sold your old property yet. This is where the lender comes in.
As long as you meet other standard lending criteria, you can essentially borrow against your current property and the new one.
Your loan size will be determined by adding the value of the new property to your existing mortgage then subtracting the estimated value of your existing home. A valuation of both properties is needed for both properties.
After that, you’ll be left with what is known as the “end debt”, which is the principal of the entire loan. It is important to understand that your ability to make loan repayments is assessed on this end debt.
Lenders use both the new and existing properties as security which means that you’ll have one home loan (called the peak debt) to cover both the existing debt as well as the cost of the new purchase until you sell your old property.
What happens after you’ve sold your property?
You continue to make normal home loan repayments, with added bridge loan interest, on the new loan.
You won’t have to wait to buy
When it comes to the property market, you snooze, you lose.
With a bridging loan, you can avoid waiting for your home loan to be approved and watching in despair as your dream home is snapped up by a couple with their pre-approval or a savvy investor.
Get into your new property right away and then worry about finding someone to buy your old place later!
The two most important things in applying for a bridging loan is to:
- Set a realistic time frame for the sale of your property. This is where people can underestimate.
- Set a realistic selling price based on a professional valuation. This is where can overestimate largely due to the emotional connection most people have with their homes.
Save on the costs of renting and moving twice
Let us suppose you decide to sell your house first before you buy a new one.
You’ll probably rent a room or an apartment and move your stuff in. After you buy your new house you’ll move your stuff once more.
This is an example of how people usually end up losing money by renting or moving twice after they’ve sold their home. However, with a bridging loan you can avoid these extra costs since you’ll be buying your new home before you sell your old one.
Alternatively, you may be better off selling your existing property first and renting rather than getting a bridging loan depending on the property market in your area. This will likely depend on the loan size and the interest you’re paying compared to how much you’ll be paying in rent in case you’re unable to sell your existing home before buying your new home.
It’s important to speak to a qualified mortgage broker if you’re considering applying for bridging finance since renting and paying for the costs of moving twice may sometimes be a better option, financially, depending on your circumstances.
Get standard variable rates
Bridging loans aren’t a new concept in the home loan market.
Their popularity increased massively after banking deregulation, also known as the free market concept, where all banks were allowed to operate in the financial market and were allowed to set their own interest rates.
The banks originally saw this type of finance to be a higher risk, leading to very high interest rates the banking industry deregulated in the mid-1980s. Although some lenders usually charge a higher interest rates for these types of short-term loans (up to one year), there are lenders that offer bridging loans with the same variable interest rates as a standard mortgage.
Keep in mind that although bridging finance allows you to capitalise interest on top of the peak debt, interest is compounded monthly: the longer it takes to sell your property, the more your loan will accrue interest.
The home loan fees are the same as well
Worrying about getting charged expensive fees for a bridging loan?
You actually don’t have to worry about higher application fees and ongoing home loan costs since they’re the same as a standard home loans. For instance,
It’s important to be aware that certain early termination fees and break costs may be applied if you plan to switch lenders during the bridging loan period.
Make unlimited repayments to reduce your interest bill
Usually, bridging loan repayments are ‘frozen’ during the bridging term until you sell your existing property. This leaves you with only having to manage making repayments for your current mortgage rather than having to pay back to separate home loans.
Bear in mind that you have the option to make unlimited principal and interest (P&I) repayments during the bridging term until your existing property is sold. This will gradually reduce your interest bill and make it easier for you to make repayments in the future.
Be careful though because you can’t redraw repayments you’ve made on the loan since redraw facilities are unavailable on a bridging loan.
Need a bridging loan?
A bridging loan is a convenient option if you’re looking to buy a property quickly and avoid the stress and hassle of selling your existing property first.
This type of finance isn’t for everyone though so it’s highly recommended that you discuss your needs with a qualified mortgage broker.
Luckily, our brokers are experts in bridging loans.
Call us on 1300 889 743 or complete our free assessment form and we can help you find a solution.