How do you get from one home to the next?
The ideal way to do it, financially speaking, is to sell your existing home first. That way you’ll know exactly how much money you can spend on your next home and how much you’ll need to borrow. Moving on to your next home this way will also put you in a good position with potential lenders for your next home loan.
But life isn’t always that straightforward. If you can’t sell your existing home first for some reason, you might want to consider a loan product known as a ‘bridging loan’, which gives you access to funds to buy your new home before you’ve sold your current one.
What is a bridging loan?
There are generally two types of bridging loans: closed bridging loans and open bridging loans. Closed bridging loans are available to borrowers who have already locked in the sale of their existing property and know when it will settle. These are usually short-term arrangements. Open bridging loans are used when the existing property has not yet been sold and these can be arranged for up to 6 months.
How do bridging loans work?
A bridging loan requires the lender to work out the size of the total loan by adding the value of your new home to your existing mortgage, then subtracting the likely sale price of your existing home. This requires a valuation by the bank which will cost approximately $200 for each property.
Typically, you pay interest-only on the entire loan amount until the first property is sold and the principal is repaid in full. Bridging loans are sometimes structured so you only make principal and interest repayments on the loan until settlement, capitalising the interest due on the rest of the loan. Either way, once you have sold your existing property, the loan reverts to an ordinary home loan.
The pros of bridging loans
The cons of bridging finance
Alternative finance options
If a bridging loan isn’t right for you, there may be other options available to get you over the line with your next property purchase – so talk with us first. For example, if you have enough equity in your existing home, you may be eligible to use a line of credit.
Other considerations
Do you really need to sell your existing home? With many of our property markets experiencing a ‘correction’ at present, it could be a good idea to keep your current property as an investment and sell it on when the market recovers. Talk to us about your financial circumstances and we’ll see if you have the borrowing power to make it happen.
The ideal way to find out which loan you need and what you can afford to do with your existing home is to talk to us first. We offer tailored finance solutions, based on your individual circumstances. So, if you’re thinking about moving on to your next home, please get in touch with us today!