What’s bridging finance and is it right for you?
You’ve decided to sell your home and buy a new one – perhaps you need a larger home for your growing family or conversely, you might be wanting to downsize. In an ideal world, you would sell your home for the price you desired and would have a new home to move into, with the settlement dates for both homes coinciding perfectly.
In reality, however, sometimes these settlement dates don’t match up. Factors such as location, the state of the housing market, the desirability of your house and your price expectations can mean your house is on the market for longer than you hoped. In this scenario, you may need to consider bridging finance.
So what is bridging finance? Simply, it is a loan that serves as a bridge, which allows you to purchase a new property before your existing property is sold. A bridging loan is typically an interest only payment home loan with a limited loan term – usually 6 to 12 months, which means you you’ll be paying off the usual repayments on your existing mortgage and only the interest of the bridging loan. The principal of 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.
Along with home-movers who may be unable to match house selling and purchase dates, bridging loans may be an option for people planning to sell-on quickly after renovating a home, or for people looking to buy at auction. Here we look at the pros and cons of bridging finance to help you determine if it’s right for you.
- - Bridging finance can help alleviate the stress
of selling your home if you’ve already purchased a new one. It leaves you less
vulnerable to housing market fluctuations and can be helpful for people who
live in a location where auction clearance rates are lower and days on market
are higher. It also allows you to hold off selling until your expected price is
- - By taking out a bridging loan, you may avoid multiple
moving costs and rental costs if you have to move out of your home following
- - With a bridging loan, you will not be required
to make full repayments on both of your mortgages, as you will only be paying
the interest of the bridging loan. This is a far more affordable option than
trying to make repayments on two separate mortgages.
- - Bridging loans may still be subject to the
usual mortgage fees and charges, such as application fees, valuation fees,
mortgage registration fees and stamp duty on the mortgage.
- - While many lenders now charge the standard
variable rate of interest on bridging loans, others will adjust their interest
rate based on your circumstance and how risky they consider your situation to
be. Remember that you will still essentially be carrying two mortgages and the
longer you take to sell your existing home, the higher your interest bill will
be. Bridging loans also work best for people with a high amount of equity in
their home, as they will be paying less interest.
- - You will still need to be realistic about the
asking price of your existing home and do your research on the housing market
in your area, to determine how long your property is likely to be on the market
before being sold. The bridging loan will be for a fixed period – between 6 and
12 months – and your lender may charge a higher interest rate if you don’t sell
your property within this time frame.
- - Bridging loans are generally not available for
construction loans or for company or strata title purchases.
If you’re thinking of selling your home contact the property experts at PRD Burleigh Heads on 07 5535 4544 or email@example.com for a free appraisal and down to earth chat about what you can expect from the current market.