When you’re buying a new family home and selling your current home, there are essentially three ways to go:
- Selling before you buy
- Using bridging finance
- Buying before you sell using a subject to sale contract.
Owning two properties with the higher level of debt that comes with this carries some risk, so to understand whether bridging finance is suitable for you, it’s useful to consider the pros and cons of each of the three paths above.
Selling before buying
Pros
- You’ll know the exact amount you’ll have to put towards your next purchase.
- You don’t have to rush it and can wait until you’re happy with the sale price of your property.
- You won’t have the concern of your current home not selling within the allowed timeframe, especially if the market softens.
Cons
- The ideal house you want to buy may not be on the market, meaning you’ll have to move out and rent while you wait to buy.
- You may have the added expense (and headache) of moving twice.
- Prices might go up after you sell and you might be priced out of the market, or you may not find your dream home for the right price.
If you sell and need to find a new home, there are a few things you can do to make the process smoother and minimise stress.
- Try to negotiate a longer settlement period on the sale of your home, so you have more time to find a new house and only need to move once.
- Organise to rent your home from the new owner to give you more time to find a property.
- Stay with family and place your goods in storage to avoid rental costs while you look for a new home.
- Put your goods in storage and rent furnished accommodation to save yourself the hassle of moving twice.
Buying before selling (subject to sale)
A ‘Subject to Sale’ offer is an offer on a property with a condition attached: the buyer has their own property that needs to be sold first. So, if you’re looking to upgrade your home and put an offer like this on a property, that offer will only proceed once your own home is sold. Typically, the contract will allow 30 days for you to achieve an unconditional contract on the home being sold, so you will need to move quickly to list your home for sale.
Pros
- You have the peace of mind of having secured your new home before having to sell your current home.
- If you can arrange a simultaneous settlement, you’ll only need to move once.
- You minimise the risk of being priced out of the market if prices are rising.
Cons
- If you’re making a conditional offer on a property in a rising market, you might need to make a slightly higher offer to convince an owner to accept the condition.
- Not knowing exactly how much you’ll sell for, you may need to be a bit more conservative with how much you spend on your new home.
- You may feel under pressure to sell which may make it trickier to achieve sale price you’re hoping for.
Bridging Finance
A bridging loan, or bridging finance, is a short-term loan that can help you finance the purchase of a new property while you sell your current property. Typically a lender will allow 6 months for the sale of your current home.
When you take out a bridging loan, the lender usually takes over the mortgage on your existing property as well as financing the purchase of the new property. The total amount borrowed is called the Peak Debt and includes the balance of the loan on your existing home, the contract purchase price of the new home and any purchase costs such as stamp duty, legal fees, and lenders fees (less any cash you are able to put into the new purchase.
Minimum repayments on a bridging loan are generally calculated on an interest-only basis, and in some cases the interest is accrued and added to the Peak Debt until your existing home is sold.
Once you sell your first property, the net proceeds of the sale (after agent’s fees etc) are used to reduce the Peak Debt. The remaining debt then becomes the End Debt, which is repaid as a normal home loan from this point onward.
Pros
- Some lenders will allow you an interest only loan with the interest capitalised during the bridging period. This means you can pay the interest from the proceeds of the sale.
- Avoiding moving into a rental property and multiple moving fees.
- Not worrying about finding a new house to buy in a hurry.
- Taking advantage of a strong market and getting a good price from your home sale.
Cons
- Not all lenders will do bridging loans, and those that do are often only for existing home loan customers, so bridging loans can be hard to get.
- Interest on bridging loans is higher than the interest on basic or packaged home loans.
- It may force you into selling your original property at a lower price to meet the time frame of the bridging finance.
- If you can’t sell your existing home for the price you need or expected, you may need to find more funds to cover the shortfall.
Some Bridging Finance FAQs
How much equity do I need for bridging finance?
This is dependent on the value of your home and the property you’re purchasing, but as a guide, you’d need to have at least 50% to 60% in equity in your existing property for bridging finance to be a potential option
What rates apply to bridging loans?
While bridging loans can be an excellent short-term option, you should be aware they’re usually much more expensive than a traditional mortgage and are subject to additional administrative and processing fees. Typically these will be at a lender’s standard variable rate (with no discounts) or potentially a little higher.
Can you pay off a bridging loan early?
Once approved, the term of a bridging loan is likely to be for 6 months when buying a new property or 12 months if you’re building a new home.
A bridging loan is a flexible short-term loan and is intended to be paid down and converted to the end loan as soon as possible. A bridging loan charges interest on the entire loan amount for as long as the bridging portion has not been repaid, as a result, most borrowers are keen to sell and finalise the bridging as soon as possible.
What happens after the sale of my property?
At application, you’ll choose a suitable home loan product for your end debt. Once you sell your existing property and the Peak Debt is paid down to the End Debt, you will be left with the home loan product of your choice.
