The pros and cons of bridging finance
In an ideal world, when you’re moving from one house to the next, you might like to have the sale of your existing home sorted before you finalise the purchase of your next one.
But things don’t always go according to plan.
Bridging finance can sometimes be a solution in situations where transactions don’t quite line up, although there are some points to watch out for.
Here’s what you need to know.
What is bridging finance?
Bridging finance is a type of home lending that can be used to help you buy a new property before you have sold your current one.
This can help if you spot a house that’s perfect for you before you’ve found buyers for your place, for example, or if you’re facing a long settlement for your sale.
Usually bridging finance is described as open or closed.
Closed is when the two sales have been agreed and the agreements are unconditional, but the sale and the purchase are not occurring on the same date. Maybe you need to settle on your new home a month before the buyers can settle on your existing home, for example.
Open bridging is when you don’t have a set date for the sale of your property to settle. You may not even have an agreement in place on it.
Is there anything to watch out for?
Bridging finance is often offered on an interest-only basis for the new lending, which means none of the principal amount is paid off.
Usually, a variable interest rate is charged, which can often be more expensive than a fixed rate, and there can also sometimes be a premium charged on top of that.
Open bridging can be risky, because you do not have a guarantee of how long you’re likely to be servicing the extra lending – and the cost of carrying two loans is likely to be significantly more than you’ve been used to.
Many bridging loans are only available for a set period of time, depending on the situation. Some lenders may also only offer bridging finance where an unconditional sales and purchase agreement is in place, and they have a firm date the bridging loan will be repaid.
It can be useful to have a strategy in place in case things don’t go as you expect. If you can’t find a buyer for your home at the price you need, what other options might you have? Would you be comfortable selling for a lower price, or would you be willing to get tenants in to help?
Talking to real estate salespeople might give you an idea of what is reasonable for your property and how long it might take to sell.
What do lenders need to know?
As with any home lending, the lender will want to know that you’re able to cover both loan repayments.
They may also want to be sure that you have a realistic expectation of what your home will sell for and might ask to see a real estate agent’s appraisal to ensure that it is reasonable. The lender may also want to see some assurance that the property should sell within six months or a year, for example, and that it does not require any major renovation work.
Some non-bank lenders offer bridging finance, which can be another option to consider.
Bridging can be a useful tool, but it is important to make sure it is used carefully and with an appropriate plan in place. As your advisers, we can help you work out the right strategy to make your settlements happen.
Like to talk?
We are home loan experts and here to help. If it’s time to move on from your current property and you’d like to discuss your home loan options, get in touch with us. Whether it’s bridging finance or just a review of your current lending, we can help you to work through the options available to you.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.
