Buying and Selling Your Dream Home: Bridging Loans
What happens when you're looking to buy a new place but you haven't sold your current place? Is it possible to buy a place without selling my current place first? These are some of the questions one may ask when looking at upgrading their home. In an ideal scenario, one would match up the dates of selling the existing home and the purchase of the new place but this is not always the case. However, this isn't always the case given varying market factors.
It's still possible for homeowner to purchase that dream home they just found prior to selling their current property using bridging loans.
What is a Bridging Loan/Finance?
A Bridging Loan is financing to help meet the gap in timing between receiving funds from the sale of your existing home and buying a new property. It helps you to pay for the deposit, stamp duty and removalist costs on a new property, as well as the purchase price on settlement.
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", 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 and have a quick conversation with your lender 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 and we'll explore the pros and cons of selling before buying and vice versa.
PROS AND CONS OF SELLING BEFORE BUYING
You’ll know the exact amount of money you will have to put towards your next purchase.
You’ll have less urgency to sell in a hurry, so you can wait until you are happy with the sale price of your property.
There isn’t a need to apply for a bridging loan to finance both properties. You won’t be in the position of having to pay two loans at once.
There may be nothing suitable on the market when you need to buy. You could end up having to move out with nowhere to go.
You might have to pay for rent and have the added expense and hassle of having to move twice.
Prices might go up after you sell and you might be priced out of the market, or not able to find the dream home for the right price.
PROS AND CONS OF BUYING BEFORE SELLING
You could avoid moving into a rental property and multiple moving fees.
You could avoid having to find a new house to buy in a hurry.
You could take advantage of a rising market and potentially get more for your money, and make more from your subsequent home sale.
If you’re making a conditional offer on a property, you might need to make a higher offer to convince an owner to hold the property while you sort out your circumstances.
If you can’t sell your existing home for the price you need or expected, you may have to source additional funds to cover the shortfall.
It may force you into selling your original property at a lower price, if you need the money to meet your loan obligations. Bridging loans must be repaid within 12 months.
You’ll have the extra cost and stress of having to repay two mortgages at once.
Interest on bridging loans is more than the interest on our standard term loans.
You may need a bridging loan in order to finance the new property.
Options when Bridging Finance isn't for you!
Buying before selling and obtaining bridging finance has its risks. We’ve run through the pros and cons of each option above. Unless you’re comfortable with the risks and it’s financially possible for you to manage two loans for a period of time, selling first is generally more advisable.
If you’re in the position of having sold first and now need to find a new home, there’re few things you can do to make the process smoother and minimise the stress.
Try and negotiate a longer settlement period on the sale of your home, so you have more time to find a new house and only have to move once.
Organise to lease back your home from the new owner to give you more time to find a property.
Stay with family and place your goods in storage to avoid rental costs while you look for a new home.
Put your goods in storage and rent furnished accommodation to save yourself the hassle of moving and unpacking twice.