Timing is often a challenge when it comes to buying a new home and selling an existing one. In a perfect world, both transactions would happen simultaneously. In reality though, you could end up owning two properties while you sell your existing home. That’s where bridging finance comes in.
Takes the pressure off
In a heated property market, it’s vital you move quickly on a purchase or you could lose out. Bridging finance helps you do just that, by taking the pressure off and letting you buy the home you want when you want it. It means you don’t have to wait until you’ve sold your existing home or have to sell in a rush for a potentially much lower price.
A bridging loan is typically a short-term loan (six to 12 months) that covers both your existing and your new debt. The loan is calculated by adding together the cost of your new home with the outstanding debt owing on your existing home, then subtracting the potential sales price of your existing home.
The leftover amount is called the “remaining balance” or “end debt”. The repayments required in the time between buying a new home and selling your existing home are generally calculated on an interest only basis. If no instalment is required by the specific lender, then interest is compounded monthly at either variable or fixed rates, which adds to your ongoing balance and increases the end debt when your existing home is sold.
It’s important you keep up your loan repayments during this time to help reduce the total amount owing on your loan and to ensure you’re not left with a hefty mortgage debt.
Keep in mind that during the bridging period, you are essentially paying off the interest on two mortgages, so be realistic about the expected sale price of your existing home as you may need to sell sooner in order to meet the terms of your agreement.
Know when it’s right for you
Choosing the right bridging loan will depend on a number of factors. Here are some questions to consider before deciding on bridging finance:
- How long do you need the funds for?
- How long will it take you to sell your home?
- Is your home ready for sale or will you need to renovate first?
- Are you building a new home or buying an established property?
- Are you (the - remove) buying a residential or an investment property?
- Can you realistically meet the repayments on your current loan and the bridging loan?
Before you apply
When structured correctly, bridging finance can be hugely helpful, but it’s important you’re equally aware of the risks. Overestimating the sales price of your existing home and taking longer than anticipated to sell can leave you with a sizeable end debt so do your homework before committing.
Check all of the loan features and have your mortgage broker go over the paperwork with you to ensure you understand this form of finance. Contact Mortgage Express to find out if bridging finance is an option for you.
References:
http://www.southerncrosspartners.co.nz/loans/bridging-finance/
https://www.canstar.com.au/home-loans/bridging-loans
https://www.yourmortgage.com.au/home-loan-guide/bridging-loans-bridging-the-gap/77543/
Disclaimer:
While all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken by Finservice Pty Ltd (Mortgage Express) for any errors or omissions. This publication does not constitute personalised financial advice. It may not be relevant to individual circumstances. Nothing in this publication is, or should be taken as, an offer, invitation, or recommendation to buy, sell, or retain any investment in or make any deposit with any person. You should seek professional advice before taking any action in relation to the matters dealt within this publication. A Disclosure Statement is available on request and free of charge.
Finservice Pty Ltd (Mortgage Express) is authorised as a corporate credit representative (Corporate Credit Representative Number 397386) to engage in credit activities on behalf of BLSSA Pty Ltd (Australian Credit Licence number 391237) ACN 123 600 000 | Full member of MFAA | Member of Credit Ombudsman Services Ltd (COSL) | Member of Choice Aggregation Services.