- 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 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.
But you will 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. Talk to your local Mortgage Choice broker to find out if bridging finance is suitable for your current situation.
- 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.
The lender takes both properties as security and you have one loan (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 don’t 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 capitalised 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 capitalising 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 capitalise repayments if the total Loan to Value Ratio (LVR) does not exceed lender approval conditions. LVR is the ratio of the amount lent to the valuation of the security. For example a loan of $270,000 on a home valued at $300,000. The LVR is $270,000 multiplied by 100 and divided by $300,000 or 90%.
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.
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 loans, 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.
Find out more from your local Mortgage Choice broker as to which method will suit your current financial situation better.
- 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). We have tools to help you work out how much your potential minimum repayments will be so that you can anticipate the changes ahead.
- Do I keep making repayments during the bridging period?
Your lender may allow you to choose to either 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. If you are unsure as to whether to keep making repayments during the bridging period, talk to your local Mortgage Choice broker and he/she will advise you on the appropriate course of action that will suit your current financial circumstances.
- 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 calculating the bridging period.
If you are unsure of how to calculate the bridging period and estimate the impact that it will have on your loan, consult with your local Mortgage Choice broker.
- 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. A deposit bond is a substitute for a cash deposit that guarantees the purchaser will pay the full purchase amount by the settlement date. Institutions providing deposit bonds act as a guarantor that payment will be made. They are generally used when cash isn’t readily available for a deposit. 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 such as shares.
When applying for a deposit bond, an independent assessment will be made by your deposit bond 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.
If you need help with the arrangement for a deposit bond, talk to one of your local Mortgage Choice brokers. They will be more than happy to assess your current financial situation and will make appropriate recommendations.
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 rental payments on this.
Your Mortgage Choice broker will be able to help you estimate the cost of bridging finance, which you can then compare to the potential cost of moving versus renting. Of course you may be lucky enough to organise a simultaneous sale and purchase, which offers the lowest risk.
- How much money will I need to set aside for stamp duty?
Stamp duty is a state government tax based on a property's selling price. Each state or territory has different rules and calculations; some states offer discounts to first home buyers. Stamp duty can be a significant additional cost when buying property. Use our stamp duty calculator to get an idea of what you will need to pay.