Whether it’s the expansion of your family or a sudden change in your circumstances, bridging finance can help you access funds to buy a new house before you sell your current home. Another key benefit is that it can help you access funds between settlement periods, which may take longer than expected. There may be several other reasons you’re considering bridging finance right now. Yet, regardless of where you’re at in your journey, in this article, we’ll cover the basics to help you understand what it all means, how it works, and whether or not it could be right for you.
What is bridging finance?
Sometimes referred to as a relocation loan, bridging finance is typically a loan that can help you nab your dream house now while you’re waiting for your current home to sell on the market. The bridging finance gives you the funds you need to make sure you don’t miss your opportunity to buy the home you want. It also gives you enough time to keep your current home on the market, alleviating any stress that may arise from rushing through a sale and undervaluing your property.
This clever video sheds a little light on what it all means:
How does it work?
Bridging finance combines the amount left on your current mortgage with the amount of your new home. This is known as your peak debt.
For example, if you have $200,000 left on your current mortgage and your new home is worth $700,000, your peak debt will be $900,000.
That sounds hefty – certainly enough to scare the pants off a few people! However, one thing to note is that most bridging finance repayments are interest-only. This significantly reduces the amount you pay during the bridging period. That said, your interest rates may be higher, costing you more in the long term.
Once your current property has sold and that amount is subtracted from the peak debt, you will begin to pay principal and interest repayments on the remainder of the loan. So, say your current home that had the remaining $200,000. If it sold for $400,000 this would bring your peak debt down from $900,000 to $500,000.
Important to note:
Principal and interest vs. Interest-only
|Principal and interest loans||This is the most common type of mortgage. The amount that you borrow is called the principal. Let’s say you borrow $450,000, your principal is $450,000. On this amount, you pay interest, so you will end up paying back more than you initially borrowed. For principal and interest loans, you repay a certain percentage of your principal plus interest on top and reduce the amount you owe over time.|
|Interest-only loans||Interest-only loans are less common as they help you defer the initial payment for an initial period of time. For a few years, you only pay interest and then start making repayments afterwards. This may allow you to keep your payments lower for a little while, however, they will increase in the future and it is important to ensure that you are financially stable and will be able to afford them.|
Bridging finance is generally offered for short terms. The terms for bridging finance are usually between 6-12 months. If your house has not sold during that term, fees may apply, and the lender may step in to assist with the sale. That’s not always an ideal option since the deal may be rushed through, which could lead to a lower sale price. It’s essential to ask your lender all of these questions and to get clarification around all of the terms and conditions. It’s also a good idea to ask about any penalties you might incur if the terms are not met. This will help in your decision-making process, especially regarding the risks involved.
Is it right for me?
Bridging finance may allow you to play the market and potentially make a profit. For example, it’s cheaper to buy a home in the colder months, and sell a home in the warmer months. Traditionally, there is less buying activity in winter, which allows more room to negotiate a better deal when buying a property. Fewer buyers in the market mean the buyers have the upper hand and are better positioned to negotiate. Spring, on the other hand, is the peak season for sales. As a seller, you can take advantage of the abundance of sellings itching to buy your property.
This is where bridging finance could help you in that period between buying a property and selling your home. Of course, there is a considerable risk involved, and one that you should not take lightly.
Other circumstances can lead to the need to purchase a property quickly, not affording you the time to wait for the sale of your existing property. Needs such as a growing family, moving closer to loved ones, being closer to work or an opportunity to move to a dream house for that long-awaited sea change. Whatever the need may be, bridging finance can help you to secure the home you want while waiting to sell your current property.
Pros and cons
As with most things in life, there are pros and cons to bridging finance. Here are some things to consider:
- Secure your dream home and move in straight away
- Have time to wait for a fair offer on your current home
- Avoid moving into a rental property while in between the sale and purchase of existing and new homes
- Potential to play the market and take advantage of real estate “seasons”
- Paying compound interest on two properties
- Bridging finance usually comes at higher interest rates
- Bridging finances increases the pressure of shorter terms (usually 6-12 months) in which you have to sell your home
First, do your research on the property marketplace. It’s important to think about the time to buy and sell. You should be realistic in your expectations of how long it will take to sell your home and how much you will get for it. You don’t want to overcommit to your next property.
If you do want to go ahead with bridging finance, make sure to shop around and find the best rates and conditions. Prepare some questions to ask each lender to help give you a clearer understanding of each product for comparison before you commit. Create a budget with a clear limit of what you can afford to stay on top of your finances. For more information on home loans, check out our simple guide.
If you have used bridging finance to get your dream home (or for any other reason) share your experience and any hot tips below.
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Oiyo is a consolidated online resource; we are not financial advisors. We work with a range of industry professionals and compliance check our articles to ensure factual accuracy. However, we do not provide professional financial advice. Consider seeking independent legal, financial, taxation or other advice to check how the information and ideas presented in this article relate to your unique circumstances.