Can I purchase a new home before I sell my old one?
You can buy a new home before you sell your existing property with a bridging or relocation home loan.
A bridging home loan bridges the financial gap' between two home loans. Bridging home loans are commonly used to finance the purchase of a new property while your current property is being sold. They can also provide finance to build a new home while you live in your current home.
The lender takes security over both properties and lends against these properties until the sale and purchase process on both is complete. During a bridging loan period, your home loan will generally be charged as an interest-only loan. Many lenders offer interest rates comparable to the standard variable rate, or slightly above.
How does a bridging loan work?
Some lenders might let you capitalise on the interest of a bridging loan, so you don't have to make loan repayments during the bridging period. If you choose to capitalise the interest, you'll most likely have a slightly higher new home loan to cover it.
Some lenders will give you six months to sell your home if you're buying an established home and up to 12 months if you're building.
When you sell your first property, the funds from the sale are applied to the bridging loan, and any remainder becomes the end debt or new home loan. At this stage your home loan will usually revert to the lender's standard variable interest rate or the interest rate you've negotiated.
Bridging loans. What you need to know.
The right bridging loan for you will depend on a few things:
- How long do you need the funds for?
- Do you have an unconditional contract on the property you're selling? Or are you yet to sell?
- Is your new property a new build?
- Are the properties you're buying and selling for investment or where you live?
- Can you meet the repayments on your current loan and the bridging loan?
Your answers will help your mortgage broker find the right bridging loan for you and how much you can borrow.
Bridging loans - a case study
A couple owned their home outright and wanted to buy and relocate prior to the sale of this property. They believed their property would present better for sale without their old furniture and they didn't want the hassle of keeping the house in perfect order for prospective buyers. As vendors, the couple were also reluctant to allow a longer than normal settlement time frame.
Their current property is valued at $450,000 and their new home is $568,000. They're on limited incomes and so could not afford a loan of $500,000. They elected to buy the new property, move in and use a capitalised interest loan. This couple sold their existing home for $612,000 within four weeks, but it's important to note there was still the risk that the current home might not have sold within the specified six months.
Bridging loan pre-approval
It's important to understand which option is the right one for you before you sign a contract for the sale or purchase of your property. Your local Loan Market mortgage broker will talk you through your options and help you organise a bridging finance pre-approval.