Can you buy before you sell? How “bridging” finance works
April 6, 2021
So, you’re ready to buy a new home to live in, but you don’t want the hassle of selling your house first, having to move out and rent for a while, and then not knowing when you’re going to find that dream home and ultimately, be able to purchase it. The convenience of being able to buy the dream home first, then sell your existing property is one that a lot of our time poor clients seek. But how does a process like this work when you can’t actually afford to have two homes at once? This process is called “bridging” or go-between finance, and it can be a bit tricky to navigate.
Here are a few things that you should know about when considering if it is the right option for you:
1. What is bridging finance?
Essentially, bridging finance allows you to purchase a new home while continuing to own and reside in your current residence. It is particularly useful for people who have used their additional savings to pay down the home loan quickly and now wish to access the equity they have built up in their home to assist with buying a new one. It is a convenient product that allows you to purchase a new home borrowing up to 100% plus costs of that new home. It also requires you to pay the debt down to an affordable level once the existing home has been sold and settled. It is particularly relevant in a situation where normal responsible lending guidelines wouldn’t allow you to hold both properties at once because the total debt would be more than what you could reasonably afford to repay.
2. How do you know if you qualify for bridging finance?
In order to access bridging finance, you need to have enough equity in your current home. A significant amount of equity is required because the total loan to value ratio (LVR) for the maximum debt, or peak debt, during the bridging period must be 80% or less (even for medical professionals). That 80% LVR across the two properties would include the principal borrowed as well as any interest which may be capitalised during the bridging period.
3. Who can provide you with bridging finance?
There are a number of finance providers who do bridging finance, but certainly not all of them. Additionally, some banks will require that you’re an existing client before they will consider it. Other banks will only do it if you already have an unconditional contract of sale for your own property. This means that you still need to sell before you buy and that takes some of the convenience out of the transaction to begin with. Some banks also charge premiums for the period while you are bridging, so your best option is to speak with someone who can access all the options and determine who the best lender is for you.
4. What are the pros and cons of buying a new home this way?
Bridging finance can be complicated and a little bit restrictive with the time period in which you have to sell your existing home. You may be required to sell it for less than you couldget otherwise to remain within the allotted timeframe for paying down your bridging loan.
On the other hand, it may well present you with the opportunity and convenience to purchase a new home before you’ve sold yours, avoiding the need to rent or stay with friends or family for an undetermined amount of time until the right property presents itself.
If you’re considering bridging finance, then it’s best to reach out to a specialist who can walk you through the process and if it really is the best choice for you.
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