Homeowners tend to have a lot of their capital tied up with their property, which means many are either relying on the sale of that home or use of built-up equity to fund the purchase of the next property. If you are planning on keeping your existing property, it is important to understand your borrowing power and the right loan structure to achieve your goal. If you are looking to buy and sell, you may want to know how a bridging loan can work to cover the gap between purchase and sale.
Generally, lenders look for about a 20% deposit. You may be able to purchase with less than this, but you will likely need to pay lenders mortgage insurance (LMI). To help cover the deposit, you may be able to use equity you have in your current property, or look to take out a bridging loan. Another option may be a deposit bond. This is essentially a guarantee that you will pay the purchase amount by settlement and is provided by an institution that acts as guarantor. You can usually apply for a deposit bond once the lender has formally approved your loan.
A bridging loan is a product that provides the finance to purchase a new home before selling your home. It is generally for a short term – usually between six-12 months as they are only intended to be used to fund the deposit for a new home loan and to be paid out when your property is sold. Bridging loans can help alleviate the challenge of buying and selling at the same time, however keep in mind they tend to be more expensive than a standard home loan.
If you intend to keep your current home and purchase another, you may be able to use equity to buy the property. Lenders calculate equity based on how much of your existing property you own outright. This amount can potentially then be used as a deposit toward buying your next property.
For example, if the lender values your property at $650,000 and your current loan balance is $450,000, your equity is $200,000. The usable equity is generally about 80% of the lender’s valuation of your property minus the loan amount. In the above example it would be 80% of $650,000, which is $520,000, minus $450,000. This would leave you with $70,000 of useable equity.
Some lenders offer a feature that enables you to take your existing home loan with you when buying a new property. This is called loan portability. If you’re happy with your existing lender and loan, this could save time in finding a new one as well as fees that can come into play when refinancing.
If you’re in the market to buy property, it is a good idea to first understand how much you may be able to borrow. This is where home loan pre-approval comes in. The lender will let you know how much it is willing to lend you based on your current circumstances, giving you confidence to look for properties within your price range.
Your Loan Market broker can help you get pre-approval.
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Find out how much you may be able to borrow to purchase property.