How to buy a new home before selling. Bridging finance explained.
Many of your clients will need to sell their existing home to purchase a new one so it helps to understand their finance options. The sale of a property doesn't always align with the purchase of a new property so I often use a bridging loan to ease financial strain during the transition.
A bridging home loan, also referred to as a relocation home loan, bridges the financial gap between having to pay for a new property and receiving the proceeds from the sale of an existing one. Bridging loans can also provide finance to build a new home while the owner lives in their current home.
How does a bridging loan work?
Generally the lender will take security over both properties and lends against these properties until the sale and purchase process for both is complete. The bridging amount or 'peak debt' will be up to 80% (depending on the lender) of the value of both properties and, like any loan product, it pays to have a mortgage broker who will shop around. Rates are often slightly higher than standard home loans however bridging or relocation loans are shorter term, generally offering a solution for no longer than 12 months.
Some lenders allow the borrower to capitalise the interest so loan repayments aren't required during the bridging period. This will result in a slightly higher home loan for the new property but can reduce financial stress during the transition period.
When the existing property is sold, the proceeds from the sale are taken off the balance on the bridging loan, and the remainder will form the new home loan.
Is a bridging loan the right move?
There are a number of factors to consider when determining if a bridging loan is suitable. One important consideration is how long the funds are expected to be needed for. This requires factoring in how motivated the client is to sell the property and if they're looking to buy an established property or build a new one. It's important that the borrower is aware that the longer the bridging loan is required for, the more interest they will be paying.
There are risks involved as well. Sometimes it might take longer than anticipated to sell your original property. It's important that borrowers understand the demand in their property market and how much the existing property will realistically sell for. I will work with them to ensure that both the bridging loan works for them in the short term and the new home loan suits their medium to long term needs.