“It provides the ability for customers to move on a property when they want to, without them having to wait to sell their existing home.” Glenn Haslam, executive manager, marketing and product development, ANZ
In a perfect world, we would all be able to precisely match up the dates that we sell our existing home and purchase a new one. But in the real world, amid price fluctuations, slowing auction clearance rates and general market uncertainty, many of us find our new dream home before we dispose of our existing one.
Bridging finance is not a new concept, although it has enjoyed a marked increase in popularity after banking deregulation. As the name implies, it is a loan that serves as a bridge, the enabling purchase of a new property before the existing one is sold.
“Before banking deregulation it was perceived to be higher risk, and accordingly interest rates on bridging loans were very high. Now, a number of lenders have developed products, which charge the standard variable rate of interest,” says Garry Wilson, mortgage broker with City Pacific Finance.
Wilson says bridging finance is not for everyone – it pays to have built up at least 50% of your existing home’s value in equity before you attempt a bridging loan. Otherwise, you may end up paying a prohibitive amount of interest.
Various lenders use different models to calculate the value of a bridging loan, but Glenn Haslam, executive manager, marketing and product development at ANZ, claims that structurally, these products are not entirely unique.
“It’s no different to any other loan with respect to fees and charges. A bridging loan is just like a normal loan with interest-only repayments until the property is sold and the principal can be repaid in full,” he says.
How does it work?
Bridging loans tide you over between the purchase of your new home and the sale of your existing one. The size of your commitment is calculated by adding the value of your new home to your outstanding mortgage (existing home) then subtracting the likely sale price of your existing home. What’s left is referred to as your “ongoing balance,” and represents the principal of your bridging loan.
Bridging loans are interest-only, so during the bridging period of say, six months, interest will be compounded monthly on your ongoing balance at the standard variable rate. The interest bill will then be added to the ongoing balance when you sell your house, and this amount becomes the mortgage on the new property.
While the interest rates on bridging loans are now comparable with ordinary mortgages, don’t forget that you are still essentially carrying two mortgages, and during the bridging period you are not paying anything off. The longer you take to sell your existing home, the higher your interest bill, and hence your new mortgage, will be.
What are the risks?
Firstly, do your sums and chat to your lender, to make sure you can afford a bridging arrangement. “How long will you be able to look after two loans for?” asks Haslam. “One of the biggest issues in bridging finance is that the borrower may have overestimated the likely sale price of their existing property, and falls short of the amount required to pay out the bridging loan.”
As with all residential property transactions, its important not to let your emotions get in the way, says Wilson. “Don’t think with your heart, and create an idealised figure in your head that you think your property is worth. Be prepared to meet the market.”
Bridging loans are still subject to the usual array of mortgage-related costs, according to Wilson. “The application fee for the bridging loan is generally around $600, which includes a valuation of one of the properties. The valuation of the other property will cost between $200-$220.”
You will also be up for a mortgage registration fee of around $100, and stamp duty on the mortgage, which is about $4 for every $1,000 worth of funds borrowed.
However, the greatest risk is that your property will not sell within the bridging period. “If you don’t sell your existing home within the bridging period, a lot of lenders will up the interest rate. Most will require you to bring the loan back to a principal and interest basis and service both loans – this can get ugly,” warns Wilson.
If structured correctly, with realistic timeframes and price estimates, bridging finance can ease the pressure of matching up settlement dates, and give you time to sell your existing property whilst securing your new one. It’s not without its risks, and requires some careful research, but if you do your sums right, you’ll be out of your old home and into your new one with minimal hassle.