Bridging Loans - Buy Your Next Home Before Your Current Home Is Sold
Buying and selling at the same time? Should you be considering a bridging loan?
In an ideal world, you would be able to buy and sell at the same time, and a simultaneous settlement can be arranged early to give you peace of mind. Unfortunately, that is not always the case, and you may find yourself wanting to buy a property before your current property has sold.
If you're not in the position to pay 2 mortgages at the same time while you wait for the old property to sell, a bridging loan may be an option.
What is a bridging loan?
The idea behind a bridging loan is simple - finance both properties in an affordable way while you wait for a sale, then pay down the total home loan balance - but the variables and structures are complex and not standard across lenders. Using a local Central Coast based mortgage broker like Mortgage Choice Charmhaven can guide you through the process to make it as simple as possible.
How does a bridging loan work?
In this example, presume you have an existing home loan of $200,000 on the home you are selling, and you want to buy a new home which will be $500,000 including costs. You would obtain a total home loan of $700,000 (often split in 2, 1 bridging portion covering the $200,000 and a second to cover the purchase). This is called the peak debt, on which interest is payable.
The $200,000 bridging portion is often interest only. Some lenders allow the interest costs to be capitalised into the loan amount rather than requiring repayments which means this amount grows over time. But to keep things simple, in this example let us presume you are paying interest only payments on both home loan portions.
You will generally have 6 or 12 months to sell the property and pay off the bridging portion of the home loan. If you sell sooner, that's great - there is no minimum commitment or fees for paying off the loan early.
In this example, your old house sells for $400,000 after costs and agents fees. The net proceeds of this sale then pays down the existing total home loan balance to $300,000 - otherwise known as the End Debt. The remaining balance will then become a regular home loan product.
Are there risks?
While bridging loans are a potential solution, buying a property before you sell your existing home can never be entirely risk free. Bridging loans often carry a higher interest rate because they are essentially a short-term line of credit. If you don’t sell your property within the specified period, you will suffer financially by having to pay large amounts of interest.
Not all lenders provide bridging finance, most exclude construction, and some lenders will only offer it to existing customers. As is the case with any home loan product, you should consider the interest rate, any fees and features associated with the loan. This information is available from your mortgage broker.
If you think you may need to consider bridging as a home loan solution, it’s essential that you seek professional advice from your local Central Coast based mortgage broker - Mortgage Choice Charmhaven.
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