Do you want to move location, upsize or simply secure your dream property without having to wait to sell your existing home? In the right circumstances, bridging loans can help with the transition from one home to another. We’ll discuss how they work to help you consider whether this type of loan might be right for you.
Give me the main points
- If you’re buying before selling, a bridging loan can provide you with the funds to secure your next property without waiting to sell your existing home.
- Your personal circumstances, timing, seasonality and market conditions are factors that contribute to the age old decision of buying or selling first.
- Like most things in life, there are pros and cons to buying first and selling later.
- Bridging finance may cost you more if you can’t sell your existing property quickly and you get stuck paying two mortgages.
- If bridging finance isn’t for you, options exist to help manage the logistics of the interim period between the sale of your house and the purchase of your new home.
- You should carefully consider your personal circumstances, and the terms and conditions of a bridging loan, in deciding whether it’s the right thing for you.
How does a bridging loan work?
Most people choose to sell their old home first and then with the available equity, buy their new home. But there are times when buying first may better suit your circumstances.
A bridging loan provides you with the funds you need to buy your new home before you’ve sold your current property.
You need finance to meet the gap in timing between receiving funds from the sale of your existing home and buying a new property. Let’s say a line of credit suited your circumstances to cover the ‘bridge’ between purchasing the new property and receiving settlement funds on the old.
Remember that when this happens, you’ll be left paying your original home loan and the bridging finance loan at the same time. You’ll have to show evidence that you’ll be able to repay the bridging finance interest costs during the period between buying and selling.
Once you’ve sold your property, you’ll need to repay the line of credit financing the ‘bridge’ within 12 months.
When is the best time to sell?
Lifestyle changes are often the reason behind your decision to sell. You may need to relocate to be closer to work or schools, have a growing family or want to downsize. Your decision to sell your property may not coincide with the perfect property market conditions but it’s important to have your finger on the pulse so you can make an informed decision. Below are some of the factors you should consider:
The real estate market changes with the seasons. Typically spring is considered the most popular time to sell, with the highest numbers of sales.
There can also be an advantage to selling your home during quieter periods such as winter. With fewer properties to choose from, more of the potential buyers will get to see your place.
- Seller’s market: When the demand for homes is greater than the amount of homes available for sale. This can be city wide or suburb by suburb. In a seller’s market you are more likely to sell your property quickly.
- Buyer’s market: When the number of houses available for sale is higher than the number of buyers who are looking to buy. In a buyer’s market you need to ensure your price is realistic and be patient, as it may take a little longer to sell.
Working out what the property market is doing and where it’s heading, can help you decide when to buy or sell. Try keeping:
- an eye on weekly property sales in your area of choice
- up to date with the wider economy and interest rate movements.
In order to determine the best time to sell, you’ll need to consider your personal circumstances, reasons for selling, market conditions and seasonal factors.
Pros and cons of selling before buying
- You’ll know the exact amount of money you will have to put towards your next purchase.
- You’ll have less urgency to sell in a hurry, so you can wait until you are happy with the sale price of your property.
- There isn’t a need to apply for a bridging loan to finance both properties. You won’t be in the position of having to pay two loans at once.
- There may be nothing suitable on the market when you need to buy. You could end up having to move out with nowhere to go.
- You might have to pay for rent and have the added expense and hassle of having to move twice.
- Prices might go up after you sell and you might be priced out of the market, or not able to find the dream home for the right price.
Pros and cons of buying before selling
- You could avoid moving into a rental property and multiple moving fees.
- You could avoid having to find a new house to buy in a hurry.
- You could take advantage of a rising market and potentially get more for your money, and make more from your subsequent home sale.
- You may need a bridging loan in order to finance the new property.
- Interest on bridging loans is more than the interest on our standard term loans.
- You’ll have the extra cost and stress of having to repay two mortgages at once.
- It may force you into selling your original property at a lower price, if you need the money to meet your loan obligations. Bridging loans must be repaid within 12 months.
- If you can’t sell your existing home for the price you need or expected, you may have to source additional funds to cover the shortfall.
- If you’re making a conditional offer on a property, you might need to make a higher offer to convince an owner to hold the property while you sort out your circumstances.
Options for when bridging finance isn’t for you
Buying before selling and obtaining bridging finance has its risks. We’ve run through the pros and cons of each option above. Unless you’re comfortable with the risks and it’s financially possible for you to manage two loans for a period of time, selling first is generally more advisable.
If you’re in the position of having sold first and now need to find a new home, there’re few things you can do to make the process smoother and minimise the stress.
- Try and negotiate a longer settlement period on the sale of your home, so you have more time to find a new house and only have to move once.
- Organise to lease back your home from the new owner to give you more time to find a property.
- Stay with family and place your goods in storage to avoid rental costs while you look for a new home.
- Put your goods in storage and rent furnished accommodation to save yourself the hassle of moving and unpacking twice.
As with any financial decision, everyone’s situation is different. Before you act, talk to one of our bankers to see if bridging finance is right for you.