In the right circumstances, bridging loans can help with the transition from one home to another, without you having to sell first. Find out whether it’s a good option for you.
How does a bridging loan work?
Most people sell their old home first, and then buy their new home with the available equity. But there are times when buying first may suit you better.
Put simply? A bridging loan provides you with the funds you need to buy your new home before you’ve sold your current property.
Let’s say you’ve found the house you want, but haven’t sold the one you’re in. You’ll need finance to meet the gap between receiving funds from the sale of your existing home and buying your new property. It’s essentially giving you a line of credit to cover the ‘bridge’ between purchasing the new property and receiving settlement funds on the old.
But it’s important to remember that you’ll need to pay your original home loan and the bridging finance loan at the same time. You’ll have to show evidence that you can repay the bridging finance interest costs during the period between buying and selling.
Once you’ve sold your property, you’ll have 12 months to repay the cost of the ‘bridge’.
When’s the best time to sell?
Whether it’s location or lifestyle, there are many reasons you might want to sell. But your timing may not necessarily coincide with the perfect property market conditions, so it’s important to know a few things about the market.
The real estate market changes with the seasons in Australia. Typically, spring is the most popular time to sell, with the highest numbers of sales.
But there’s a plus side to selling your home during quieter periods, like winter. With fewer properties to choose from, more 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. In a seller’s market you're 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, it’s all about being realistic about price and being patient.
Working out what the property market is doing and where it’s going can help you decide when to buy or sell. Try:
- keeping an eye on weekly property sales in your area of choice
- staying 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 you’ll have to put towards your next purchase.
- You don’t have to rush it, and can wait until you are happy with the sale price of your property.
- You won’t need to apply for a bridging loan to finance both properties – and you won’t have to pay two loans at once.
- The house you need may not be on the market, meaning you’ll have to move out without a permanent place to live.
- You might have to pay for rent and have the added expense and hassle of moving twice.
- Prices might go up after you sell and you might be priced out of the market, or not able to find your dream home for the right price.
Pros and cons of buying before selling
- Avoiding moving into a rental property and multiple moving fees.
- Not worrying about finding a new house to buy in a hurry.
- Taking advantage of a rising market and potentially getting more for your money, and making more from your 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 payments. 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 find more 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 taking out bridging finance has its risks. We’ve run through the pros and cons, but you need to be truly comfortable with the risks. You also need to ensure it’s financially possible for you to manage two loans for a period of time. If not, selling first is the way to go.
- If you’ve sold and now need to find a new home, there are a 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 rent 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 position is different. Before you decide to take out the loan, have a chat to one of our bankers to see if bridging finance is right for you.
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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.