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Need a loan for your next home- what is bridging finance, how does it work, pros / cons and other options…

July 28, 2019

Whether you’re upsizing, downsizing or just moving to a home in a new location, no doubt things have changed since buying your last home. This article explains the finance options available when you’re moving on to your next home. We also highlight a few other key considerations to think about.

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 loansare 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

• You won’t miss out on your ideal property.
• If you want to build your next home, you can stay in your existing property until the new one is completed.
• You won’t have to worry about matching up settlement and move-in dates.
• You may achieve a better price for your existing property without the pressure of having to sell immediately, particularly in the current selling environment.
• You can avoid the costs of renting while you’re between homes and paying the movers twice.

The cons of bridging finance

• During the bridging period, you’ll have two loans that are accruing interest.
• Both properties will have to be valued by the lender – which could be costly.
• The longer it takes to sell your existing home, the more interest you’ll pay, as the interest is compounded monthly.
• If you don’t sell your current home within the bridging period, you could be required to pay a higher interest rate to continue. .
• You’ll need at least 20% of the total value of both properties (either in cash or equity in your existing property) to qualify for a bridging loan.

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!

This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.  Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.