When you are buying a new home, you are focused on getting the best value for money, in the nicest neighborhood, with the right features for your family. However, if you are upgrading your family home, then you will also need to be thinking about whether you want to sell your existing home before buying a new one, or whether you will buy your new home and then worry about selling your old one.
If you opt to buy a new home before selling your old one you won’t have to worry about finding a new home before settlement on your old home and you won’t have to worry about being homeless if it takes longer than expected to find your new dream home. However, what you will need to work out, is how you are going to buy your new home before selling your old one, because few people have the cash for a new home lying around, and you’re probably relying on the equity in the sale price of your old home, to finance your new one.
That is where bridging finance comes in as it can help you own two properties at once, as your lender advances you the funds you need for your new home, without calling in the loan on your existing home until it sells.
How does bridging finance work?
Bridging finance is usually a short term loan for around one to six months and helps make the transition from your old home to your new one smooth and easy. A bridging home loan will be approved based on the amount of equity you have in your existing home. Your lender will then advance you the amount you need to buy your new home, which can often also include the money you need to cover fees and other home buying costs.
Once you have bought your new home you can move straight in, and then take your time selling your old home to the right buyer, at the right price. In some cases you can also capitalize your interest into your equity amount so you may not have to make repayments on two mortgages at the same time, instead the costs come out of the sale price.
The interest rate on bridging finance may be calculated monthly or yearly and can be as low as 1.5% or as high as a normal home loan at around 6% interest.
What are the advantages of bridging finance?
When you are looking for bridging finance it is important to remember that the features of a bridging loan can be as varied and inclusive as those you compared when looking for your original home loan. Therefore, make sure you look for features and benefits such as:
Interest only repayments during the bridging period.
Flexible repayment options on your bridging loan, and on your standard loan once your old house is sold.
Your choice of term where some bridging finance loans can have a loan term of up to 12 months.
Standard variable interest rate, rather than an inflated bridging interest rate.
When you are buying a new home, there is pressure from all sides – your children each have their own demands for their new home, your parents want you to stay close to them and there is the all important matter of proximity to your partner’s friends. Therefore, when you are able to remove the pressure to sell your old home, and be free to enjoy the house hunt and the excitement of moving into your new home, then relieving the pressure of the move can be the biggest advantage of all.
Bridging finance is also advantageous because it is usually quick to organize, and so there is little risk you’ll miss out on your new dream home thanks to approvals processes. Plus, you can use bridging finance to buy at auction, as a first or a second mortgage, to renovate your home, build a new home or consolidate debts.
Most importantly, look for the added advantage of deferring fees and repayments until your new home is completed or your old one is sold as this will reduce financial pressure too.
What to watch out for with bridging finance?
Before you decide that bridging finance is the right option for you, make sure that you can minimize the risks such as:
Your old home takes longer to sell than expected. Before you apply for bridging finance, do some research into your neighborhood, asking local real estate agents should be informative, and find out how long houses are usually on the market for. It may also be useful to find out if there is anything you can do to ensure your house sells more quickly, such as some minor renovations or repairs. When your old home doesn’t sell as quickly as you’d hoped, the interest on your bridging loan can add up, and eat into your equity.
Can you rent your home? If the market is particularly slow, it may be possible to bring in short term tenants to rent your home while it is on the market. This rental income can go some way to cover the interest costs of your bridging finance.
Do you have enough equity? To be approved for a bridging loan you may need to have sufficient equity in your home to cover the amount, so make sure the budget for your new home and the funds you have to finance the bridging term match up.
You may have to sell your home for a lower price. Even though bridging finance is easy to use and obtain, you will still be aware of the interest charges adding up, so you may be forced to sell your home for a lower asking price, just to be free of a drawn out bridging loan contract.
Watch for higher interest rates. Some lenders will apply a higher interest rate to bridging finance because it is perceived to be a greater risk. Therefore, you will need to shop around for the best interest rate deal.
When should bridging finance be used?
If you weigh the risks and advantages of bridging finance for your situation you can make just about any buy and move easier and less stressful. You can also using bridging finance if you are building your new home and you simply stay in your old home until your new one is completed, at which time your old home can go on the market.
You can also use bridging finance to cover a short time period, for example a gap between the settlement period of your old home and your new home. While you are not waiting to buy your new home or sell your old one, there is still a period where you will have two home loans until sales are processed.
Remember that you don’t have to obtain bridging finance from your existing lender, you can shop around for the best deal and have your new lender who is offering you a great deal on your new home loan, provide the bridging finance as well.
Bridging finance is not used only in the home and investment loan markets and can be used for cash flow purchases or to cover unexpected costs in a business, or to fund the expansion of a business or premises. You can also use bridging finance to purchase shares, other investments, or pay your tax bills, while the bridging finance is still secured by the equity available in your property.
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