Bridging Loans – Helping You Move Home Sooner
It’s spring finally after freezing through the winter here in Adelaide. The sun starts to shine a bit more, the bright flowers are coming back out and everyone gets a little pick-up in their mood!
Spring is also the time when people start to look for a new property and new listings pop up. Whether that’s an upsize for a growing family who are looking for a garden, families looking to move closer to schools, the beach or shops or even downsizers perhaps looking to get that dream place that doesn’t require a massive amount of maintenance.
So if you own an existing property, is it possible to buy before you sell?
The answer is yes!
Current property owners can use Bridging Home Loan products to help purchase. Fortunately, there are several lenders in this space although the way they treat Bridging Loans varies a fair bit.
How does it work?
The lender will refinance your current home loan at the same time as financing the purchase of your new property. The lender will then value both properties and lend a maximum of 80% of the total value. This is a general rule of thumb and needs to cover all transaction costs.
Once you sell your original property, the funds are used to pay down the home loan to the required amount. This is usually agreed upfront as part of the initial home loan application. This leaves the on-going home loan with the conditions and terms that meet your needs.
What are the benefits?
More Favourable Contract Conditions
When buying you can purchase subject to the sale of your current property. This can be unattractive to a seller. It may mean paying more for the property as a sweetner for the clause. Or it may just get rejected outright depending upon the sellers circumstances. If they need to sell quickly they are unlikely to want to take on the risk of you selling your property too! It also means you are unable to move into your new property in general without selling your old property so can become a drawn-out (and emotional) process;
You do not need to rush selling your current property
Everyone wants to sell their property at a premium price, right? To do this it normally takes a bit of time for the agent to market the property, drum up interest then negotiate favourable terms. Rushing to sell your property could cost you tens of thousands especially if buyers detect you need to sell quickly! Most bridging loans allow you 6 months on average to sell your current property. This will give you time to spruce the place up, market the property well and sell for a better price;
Ability to Capitalise Interest
Obviously carrying the full debt of two properties will be out of reach for most people. Some lenders will allow capitalising of interest during the period of transition. This means interest that accrues during this time gets added on to the loan balance. As well as being more flexible (no repayments during the bridging period), the lender is able to calculate whether you can afford the loan on the ‘end debt’ once the current property has been sold.
Not all lenders allow capitalisation of interest and some lenders will use the ‘peak debt’ to judge to see if you are able to afford the loan. This makes it very hard for many borrowers to meet the eligibility criteria;
Bridging for Construction
You’ve found that perfect bit of land and want to build brand new, no dramas! A bridging product may still work for you. Generally, with construction bridging you get an extended period of 12 months to sell your existing property whilst you build your new home.
There is obviously a risk that you do not sell your existing property within the six-month timeframe. It is always best to consult a real estate professional to get a feel for how property is moving in your suburb. Failure to do so will put your loan technically in arrears and may affect your credit rating;
Whilst there are the benefits above for capitalising interest, obviously you end up paying for interest on an enlarged home loan. Even though it is for a small period of time, it is worth trying to at least meet the interest costs while the bridging loan is outstanding;
There is generally an extra admin fee to deal with the additional work for an approval and additional work required behind the scenes. Some lenders also have a higher interest rate during the bridging period whereas others will use a standard home loan at their usual rates. If you use a different lender to your existing lender you will also have to pay extra mortgage registration and discharge fees (government fees). Make sure you shop around or use a mortgage broker to help you select the most suitable product for your situation.
So you don’t have to potentially miss out on that dream property before summer. Bridging loans are a great short term solution that overall may help you save thousands on purchase or sale price.
If you have any questions or queries please do not hesitate to contact me. If you know of friends or family looking to buy, pass on my details.
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Gareth Thomas – Director, Jobelle Finance
mobile: 0400 986 020
Disclaimer – the above is General Advice only and current as at the date written. As with all lending products, differing eligibility criteria applies to different lenders – products are not supplied by Jobelle Finance. Consult your team of professionals on all matters to find out what options are available to you.