There will come a time when it would be necessary for you to move and invest in a new home. Lifestyle changes, career transition, downsizing, and moving closer to work or school are some of the common reasons why you might decide to sell your house and start anew.
When you relocate, you will have to make a choice regarding whether to buy a new home or sell your current home first.
If your relocation needs are urgent, you will usually have little choice but to buy a new home before you sell your current property. But how do people afford a new home on top of an existing mortgage? By virtue of a bridging loan.
What is a bridging home loan?
As its name implies, a bridging loan 'bridges' the gap between two home loans by financing the purchase of your new property while the other property is currently being sold. This allows you to have temporary ownership of both properties by paying your existing mortgage and interest on the finance for the new house until you dispose of your old property. Essentially, this loan buys you time, allowing you to efficiently maximise the sale price of your property rather than urgently selling it.
With this loan, the provider takes security on both the old and new property and through the course of the bridging period, your loan will be charged as interest-only.
How does a bridging home loan work?
Loan providers ordinarily use one simple formula to determine how much you can borrow: add the existing mortgage with the value of your new home, then deduct the value of your current home. This means that the more equity you have in your home, the smaller your bridging loan will be.
As mentioned earlier, these loans can be settled as interest-only and lenders typically set a time limit of around six months for you to sell your current property. The proceeds from the sale will then be applied to the bridging loan and the remainder becomes the debt you have to settle for your new home. So, if you are able to sell your home in the third month, for instance, you will be required to pay for the interest of those three months.
What are the advantages?
The biggest advantage bridging loans can offer you is the ability to purchase your new home right away instead of having to sell your property first.
With bridging home loans, you also get to have more time to look and get a better price for the property you are selling.
Additionally, loan providers charge standard variable interest rates and the fees and charges are the same with those of a standard home loan.
Are there risks and disadvantages?
Perhaps, the biggest struggle you can face when you avail of bridging loans is the fact that interest is compounded monthly. This means that the longer it takes for you to sell your current home, the higher loan will accrue interest.
There is also the risk of bearing a higher interest rate should you fail to sell your property within the bridging period. Alternatively, some lenders will have you start making principal and interest repayments on the peak debt, so as to work towards settling both loans.
Is this the right option for you?
Bridging loans are not a one size fits all solution for those looking to sell and purchase a new property. Just as you would with refinancing, it would be best to consult with experts to help you assess your financial health and seriously consider the potential that you will have to bear a significant burden if things do not end well – it is essential to determine whether you can meet the repayments on both your current loan and the bridging loan.
A major part of the process is properly estimating how long it will take for you to sell your property. If you are reasonably certain that the process will take, at most, a few months to a year, a bridging loan could certainly be a great help.
When is the right time to sell?
Another important thing you have to consider before making this big decision is the current condition of the market. It's basic supply and demand, but it bears repeating: If there are more buyers than homes, odds are you will be able to sell your property quickly. The last thing you want is to be selling in a buyer's market, when the number of homes outpaces the current housing demands.
Seasons also affect the real estate market, and you'll find spring and winter (winter because of the lack of homes for sale) are usually the best for sellers.
So, buy first or sell first? Selling first is usually the more logical and advisable route to take, given that you will get to know how much money you'll be able to put towards your next home. This way, you won't overestimate the sale price of your property and ambitiously buy a new home.
Of course, selling first carries the 'risk' that you could sell too quickly, and have to vacate sooner than expected with nowhere to go, forcing you to rent while you continue to search for a new property.
If you think you can sell your property in just a few months, then it may be better to buy a new home first, as this can help you transition gracefully between the two properties, which is, after all, the purpose of a bridging loan.
Last words of advice...
Whether a bridiging loan is right for you boils down to timing and realistic expectations.
It's also important to have at least 50% equity in your existing property – this will allow you to avoid higher interest charges on the bridging loan.
Lastly, you must have a tight and clear grasp of the current market conditions. Educate yourself about the market, be up-to-date with real estate trends, and don't be afraid to avail yourself of expert advice.