Next Home Buyers FAQs
I’ve found the next property I want to buy but haven’t sold my existing property yet. Should I consider bridging finance?
Bridging finance is an option in this situation – whether you are buying or building your next home. But you need to carefully explore all the options before you commit. For most people it is far more advisable to sell your existing property before you commit to a new one.
Bridging finance is available to those people who are looking to purchase or construct a new home prior to selling their current property even if the proceeds of the sale of their existing home are required for the new purchase.
Are there different types of bridging loans?
There are different methods of arranging bridging finance and also different variations to each method depending on which lender you choose to use.
Method 1
The lender takes both properties as security and you have one mortgage (Peak Debt) to cover both the existing debt and the new purchase. You then typically have a period of 6 - 12 months (the bridging period), in which to sell your existing property. During this bridging period, different lenders have different repayment requirements.
Some lenders do not require repayments during this period. Instead, the interest on the loan is added to the total loan amount. This is called capitalising repayments. Your Peak Debt will therefore be increasing each month as the interest is added to your loan. Your monthly interest will also be calculated on your Peak Debt including the capitalized repayments.
Once you sell the property, the proceeds of this sale are then put towards the overall Peak Debt leaving the client with an End Debt or Final mortgage.
This End Debt is then transferred to a regular mortgage product and paid as per any other regular mortgage with the new purchase being held as security.
Please note that borrowing capacity is usually assessed on the End Debt and not the Peak Debt. However, if the property is not sold during the bridging period, repayments may be required on the Peak Debt, which could cause financial strain on the borrower as they may not have the income to service the loan.
It is highly recommend that at least some repayments are made during this bridging period where possible so as to minimise the interest and overall Peak Debt.
Other variations of this are:
- where the lender requires repayments on your existing mortgage whilst capitalizing only the repayments on the new purchase; or alternatively,
- where the lender requires repayments on the whole mortgage during this period for both the existing and new purchase.
Clients will only be able to capitalize repayments if the total Loan to Value Ratio (LVR) does not exceed lender approval conditions.
Example:
You have a $250,000 mortgage on a $500,000 house and want to buy a new home worth $400,000 plus costs of $50,000, which brings the new purchase cost to $450,000.
Your new Bridging Loan will cover the initial $250,000 to pay out the existing mortgage and also the $450,000 for the new purchase bringing your total loan to $700,000.
Once the property has been sold (in this case for $500,000) this amount (is then put towards the mortgage which consists of the original $700,000 loan + capitalised repayments. This reduces the mortgage to $200,000 + capitalised repayments. You then continue to make standard loan repayments under a standard mortgage product.
Method 2
A second loan is taken out for the new property, and the existing mortgage on your current home is retained. Repayments are required on both mortgages, to both lenders but you usually have an extended period of 12 months rather than 6 months, depending on the lender, to sell the property. This means that you must be able to make repayments on both properties for this whole period.
Once the first property is sold, the lender holding the original loan is paid out first and any remaining funds go towards reducing the new mortgage on the new property.
How are repayments calculated during the bridging period?
While the sale of the existing home goes through, the minimum repayments are usually calculated on an interest only basis. Depending on your lender you may be able to capitalize all repayments until the sale is completed but remember this option will cause your Peak Debt to increase and therefore increase the overall interest you will pay.
Wherever possible, making some repayments is recommended so that if you do have difficulties in selling your property, you will not have an additional 6 months repayments added to your loan amount (instead, the amount to be added to your loan will be reduced by whatever you have already repaid).
Do I keep making repayments during the bridging period?
Your lender may allow you choose either to capitalise your repayments (add them to the total amount of the loan), or continue to pay them. If you continue to make repayments, this will stop the total amount of the loan ballooning and limit the amount of additional interest being charged.
Are there limits on how long I can take out bridging finance for?
You will normally have six months to sell the existing property or 12 months if a new property is being constructed. If the property has not been sold by that time, the loan will be reviewed and new arrangements may need to be put in place.
Remember that a standard settlement in some states can take up to 6 weeks so this needs to be taken into consideration when calculation the bridging period.
If I am getting bridging finance, do I need to arrange a deposit on the second property?
Yes. If you do not have funds readily available then a deposit bond is one alternative. You can apply for a deposit bond once you have the formal approval from the lender, or if you can show that you have access to funds from another source eg shares.
When applying for a deposit bond, an independent assessment will be made by your deposit provider. Bonds can be issued for a period of up to 48 months, however the shorter the period the bond is required, the lower the cost to the borrower. A bond for a 10% deposit on a $500,000 property will typically cost around $600.
How can I work out if it’s cheaper to sell my property first and rent, or buy somewhere new first and take out bridging finance?
That will depend on the rental market in particular and the state of the housing market generally. It will also depend on the size of your mortgage and how much interest you are paying as compared with the type of property you might be looking to rent and the subsequent payments on this.
Your Mortgage Choice broker will be able to help you estimate the cost of multiple moves against the likely cost of bridging finance. Of course you may be lucky enough to organize a simultaneous sale and purchase, which offers the lowest risk.