Bridging The Gap Between Your Existing And New Home
5 May 2021 | 4 min
Thinking about moving to a new home? But currently in the process of trying to sell your current house. Balancing the two can sometimes leave you without the sales needed to help purchase your new home.
Consider a bridging loan, to help avoid the stress of matching up settlement dates and help bridge the gap between the two properties. It's a type of short term loan designed to help assist in purchasing your new home without the worry of temporary cash flow problems.
How do bridging loans work?
Bridging loans allow you to access the funds required to help pay for your new home even before you sell your current home.
This type of loan is interest-only, where the interest is calculated based on the amount you borrowed for the new property on top of the amount you owe on your older home loan.
Effectively since you have two mortgages at once, some lenders will require you to make interest-only loan repayments or interest charges onto your peak debt until your first property sells.
Once you sell your old property, funds can be used to pay off the existing debt on it and reduce your bridging loan amount before this loan is converted to a normal loan.
Abacus Finance Example:
For example, if you still owe $400,000 on your old home loan and your new home is $800,000 your peak debt becomes $1,200,000. Majority of lenders allow home buyers to borrow up to 80% of the combined value of both properties. After, you sell your existing property for $600,000(net proceeds) repay your existing debt the end debt on your new loan will be $600,000 (peak debt - net proceeds). From that point on, you're making repayments for a standard loan.
Open bridging loans
Open bridging loans are utilised by borrowers who have yet to find buyers for their existing properties. Usually arranged for a bridging period of 12 months maximum. Lenders are generally more hesitant about this type of loan so will expect to see details for the new property and proof that you're putting your house on the market.
Closed Bridging loans
Closed bridging loans are available to people who have found a buyer for their existing property but have not completed all the required paperwork.
Bridging risks to consider
Of course, with most home loans, there are always risks to take into consideration before you apply for one. Here are some key considerations to think about:
1. Interest rates
In comparison to your traditional home loan, interest rates are generally higher. The repayments are done monthly, so the longer it takes to sell the more interest you pay.
2. Lack of redraw facility
This type of loan doesn't offer a redraw facility. Meaning if you need to withdraw your money from extra repayments you made towards your bridging loan it will not be possible
Lenders will access your eligibility based on the current home equity you have on the existing property. If you fail to meet these requirements, lenders may apply a higher interest rate.
4. Additional costs
Having a bridging loan may require two valuations on your current and new property. This means valuation fees for both properties.
Is a bridging loan suitable for you?
Some key things to consider before you apply for a bridging loan includes the following:
- Have a proper valuation of your existing property and evaluate how much you can sell it for
- Consider how long it takes to sell your property. Remember that settlement can take up to 6-8 weeks alone.
- Are you able to make a few repayments during the bridging period to reduce the interest and peak debt?
- If you're able to sell your home before buying then you most likely don't have to take out a bridging loan
- Have a plan B, if you can't sell your property. Could you afford to rent it out?
We can help to find a suitable solution
Like any other home loan, it's important to consider and evaluate your current financial situation, and assess if a bridging loan is best for you. Debt is not to be taken lightly and it pays to get some expert advice from an Abacus Finance mortgage broker. Speak to us today, and will help to find a suitable recommendation for you.
The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.