March 05, 2024 by Mortgage Choice Rosanna
If you’re planning to buy your next home, you may think of selling your current place first. It’s a logical step that makes sense financially, and in an ideal world, that wouldn’t be an issue. But in today’s heated market, the strategy can be pretty risky if you can’t find another property by settlement day.
An alternative strategy is to buy your next home before selling your old place. But what about your existing home loan? This is where a bridging loan comes in.
What is a bridging loan?
A bridging loan is a short-term loan that provides you with the funds to buy your new home before you’ve sold your old place.
A bridging loan is based on the amount of equity in your existing home and the purchase price of your new home. This total amount is known as your peak debt.
When your old property has sold, the sale price is deducted from your peak debt and the amount left is the end debt. From this point, your bridging loan reverts to a standard home loan.
Bridging loans are typically interest-only, so you don’t need to make any repayments until your existing home is sold. However, interest is charged during the bridging period and is added to the bridging loan.
There are two types of bridging loans:
Closed bridging loans
Closed bridging loans are for sellers who are in the process of selling their home and have a set date of sale. These loans are considered less risky by lenders as the property has already sold and they know when they will receive payment.
Open bridging loans
Open bridging loans are for sellers who haven’t sold their current home. They typically have loan terms of six to 12 months. Lenders will ask for extra details when taking out this loan, such as proof that your existing home is for sale, and you’ll need to have a reasonable amount of equity in the property you’re selling.
How much can I borrow?
With a bridging loan, you can borrow up to 80% of the peak debt. It will mean that you need to have at least 20% of the peak debt in your savings as a deposit for your new place.
Benefits of a bridging loan
- You don’t have to worry about buying your next home by settlement day.
- You avoid paying for two home loans as you’ll only have one set of repayments.
- If you’re building a new home, a bridging loan lets you stay in your current place until it’s finished.
Disadvantages of a bridging loan
- The time limit may not work out if you have trouble selling your home or settlement is delayed.
- If your home takes a while to sell, you will pay more in interest.
- Bridging loans have no redraw facility, so you won’t be able to access any extra repayments you make during the bridging term.
Other considerations
For a bridging loan to be worthwhile, you should have at least 50% equity in your existing property.
It’s a good idea to see a financial adviser or a broker who can help minimise the risks, such as the property not selling within the agreed time or selling for a price under expectations.
You should also consider other options that allow you to buy a new home before selling your existing one. These include:
- Placing a deposit bond on your new home – A deposit bond is a financial guarantee that is used instead of a cash deposit.
- Negotiate the purchase contract – You might be able to add a “subject to sale” clause to the contract for your new home. This means the contract on your new home isn’t unconditional until you’ve sold your existing home.
- Negotiate a longer settlement period on your new home – This can give you extra time to sell your current home
Get in touch with Mortgage Choice Rosanna!
We would love to chat with you and advise if a bridging loan is the right option for your financial situation. We’ll also compare lenders to find the right one for you and take the legwork out of the application process. Contact us today on 0419 587 863 or email martin.reichert@mortgagechoice.com.au
