How bridging finance can help you get into the home of your dreams
Spring is traditionally a busy time of year for the property market. Warmer weather, brighter days and flowering gardens provide the perfect opportunity for sellers to present their homes in the best light. And with a lot more properties for sale, it’s also a great time for prospective buyers to grab a bargain. But what happens if you’ve found your ideal next home before your current property has sold?
“If you find yourself in this situation and don’t want to miss out on buying your new home, bridging finance may be a good option to consider,” says Mark Nelson of Homeloans Rockingham.
What is bridging finance?
A bridging loan allows you to purchase a new home before you sell your existing property. The particular features of bridging loans will vary between lenders, but in simple terms, it is a temporary arrangement that allows you to borrow the amount outstanding on your existing home loan plus the funds that you need to purchase your new home. Depending on your situation, you may even be able to include other purchase costs such as stamp duty in your bridging loan.
How it works
As mentioned above, the bridging loan options offered by different lenders vary. But most work by either combining the loan amounts for both properties into a single, short-term bridging loan; or by allowing you to effectively take out a second loan for the purchase of your new property.
In both instances, bridging finance is usually offered with interest only repayments or various flexible repayment options and some bridging loans, such as the Homeloans MoniPower, don’t require any repayments at all during the bridging period*.
When you sell your existing property, you then use the proceeds of sale to reduce the balance of your bridging loan(s). If you have an outstanding loan amount for your new property, this will usually revert to a standard home loan.
When to consider bridging finance
There are three common situations where bridging finance may help home buyers, including:
1. When your existing property hasn’t sold, but you’ve found a new home that you want to buy
Why miss out on the home of your dreams? By taking out a bridging loan, you can go ahead and purchase your new home, without having to rush the sale of your existing property or suffer the financial stress of making full repayments on two home loans.
2. You’re building your new home, but don’t want to have to move to a rental property during the construction period
If you’re building your new home, taking out a bridging loan during the construction period, instead of putting your existing home on the market straight away, could save you the hassle of finding short term rental accommodation and moving house twice! With a bridging loan you could stay in your existing property until your new home is built. You would just need to put your existing property on the market a few months before the completion date for construction.
3. Your existing property has sold and you’ve purchased a new home, but there is a gap between the two settlement dates
If the sale of your existing home and the purchase of your new home occur quite close in time, it can be quite difficult to achieve simultaneous settlement. If the settlement date for the sale of your existing property occurs after the settlement date for the purchase of your new home, you may find yourself in need of funds during the gap. A bridging loan can be a useful short term solution in such situations.
What to look out for
It is important to keep in mind that bridging finance is a short term solution only. Most bridging loans have a maximum life of six months for the purchase of an established home or 12 months if you’re building your new home. You need to be aware that if your existing property doesn’t sell within this timeframe, it is likely that you will be required to make full home loan repayments for both properties.
Therefore, before taking out a bridging loan, it is important to be fairly confident that you will be able to sell your existing property within the stipulated time frame. Be realistic with your asking price and carefully consider offers that you receive. It may be the case that selling your existing property for slightly less than you had hoped saves you from the potential financial hardship and stress of not selling your home before your bridging period ends.
It is also important to realise that if you are not making any repayments during your bridging period, you are not making any headway into your home loan which may affect your long term financial goals. A possible solution is to find a bridging loan that is packaged with an offset account. This will allow you to continue making regular payments into the offset account which has the double benefit of keeping you in the habit of making your mortgage repayments whilst also reducing the interest payable on your loan.
“But not all bridging loans are the same,” says Nelson.
“While there are many good bridging finance options available, offering competitive interest rates and great features, there are also many that aren’t so great. It is essential to shop around for your bridging loan and carefully consider each loan’s interest rate and other features,” he says.
“For example, Homeloans calculates your ability to service your bridging loan based on the amount of money that you will owe after your existing property sells (your end-debt). But many lenders don’t – they base their calculations on your ability to service the entire debt and this will make a big difference to your borrowing power.”
Homeloans MoniPower is a competitive bridging finance option with a low interest rate, offset account, capitalised interest and a fixed rate option. Click here to find out more.
*Article refers to Homeloans MoniPower loan. Terms, conditions and lending criteria apply.