A bridging loan, or bridging finance, is a short-term loan that can help you finance the purchase of a new property while you sell your current property. 

With high levels of competition within the Perth property market currently, a lot of people are also wanting that extra security to know they have been able to secure a new home before they go ahead and sell. 

Bridging finance may provide the answer to affording to do both, but it is not the best option for every case and it’s important to understand the pro’s and cons. 

How does a bridging loan work?

Bridging loans provide cover for the gap created when you buy a new home and are waiting to receive funds from the sale of your current property. 

Essentially, a bridging loan is a line of credit to cover the ‘bridge’ between purchasing the new property and receiving funds from the settlement of the old property. 

It’s important to remember that you’ll need to pay your original home loan and the bridging finance loan at the same time. The two amounts are usually added together. This is known as “peak debt”. The peak debt consists of the balance of the loan on your existing home, the contract purchase price of the new home and any additional purchasing costs such as stamp duty and lenders fees. 

The minimum repayments on a bridging loan will generally be calculated on an interest-only basis, and in many cases this interest may be capitalised or accrued until the existing home is sold.

Once you sell your property, the net proceeds of the sale (sale price minus any sale costs such as selling agent’s fees) are used to reduce the Peak Debt. The remaining debt then becomes the End debt , which is then repaid as a standard mortgage.

Selling before buying

Is it a good idea to sell your house before buying a new one? Let’s examine some of the possible pro’s and cons

Pros

  • You’ll know the exact amount from the sale of your home that you’ll have to put towards your next purchase
  • You don’t have to feel the pressure of selling quickly and can wait until you get an offer you are happy with
  • You won’t need to apply for a bridging loan to finance both properties 
  • You won’t have to pay two loans at once.

Cons

  • You may not find a home you want to buy before you need to move out of your existing home, meaning you will need to find temporary accommodation in between. 
  • You might have to pay additional expenses such as rent and the costs associated with storage or moving twice. 
  • House prices might go up after you sell and you might be priced out of the market, or not able to find a suitable home for the right price.
  • Buying before selling

Pros

  • Avoiding moving into a rental property and multiple moving fees.
  • Not having to rush the decision of buying a new home.  
  • Take advantage of a rising market and potentially get a better sale price for your home.

Cons

  • You may need a bridging loan to finance the new property.
  • Interest on bridging loans is higher than the interest on standard term loans.
  • You’ll have the extra cost and stress of having to repay two mortgages at once.
  • It may force you into selling your original property at a lower price if you need the money to meet your loan payments. Bridging loans must be repaid within 12 months.
  • If you can’t sell your existing home for the price you need or expected, you may have to find more funds to cover the shortfall.

When might bridging finance not be a good option?

Taking out bridging finance is not without an element of risk. Considering the pro’s and cons outlined above, you not only need to be sure that you are in a position to service two loans, but that you are comfortable accepting the risks. If not, then it may mean that you would need selling your property first and mitigate your risks by having a back up place to stay if you do not find a suitable home to buy in the meantime.

If you’ve sold your home and now need to find a new home, there are a few things you can do to simplify the process and minimise any stress.

  • Negotiate a longer settlement period on the sale of your home, so you have more time to find a new house and only have to move once.
  • Organise to rent your home back from the new owner to give you more time to find a property.
  • Stay with family and place your goods in storage to avoid rental costs while you look for a new home.
  • Put your goods in storage and rent furnished accommodation to save yourself the hassle of moving and unpacking twice.

With the Perth property market continuing it’s rise, with no end in sight in the next 12 months, it’s important to weigh up all your options when considering bridging finance. As with any financial decision, everyone’s situation is different and there are many moving parts. If you need help determining the numbers and whether it might work for you, simply book in for a chat and we can run through it with you. 

A mortgage broker is there to act on your behalf, and give you unbiased information so that you can make an informed decision. 

For more reasons why to use a mortgage broker, click here, or if you’re all ready to go, we’d love to hear from you today. 

All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.

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