You may already be servicing a mortgage on your current home and will need to finance the purchase of the new property. However, most buyers will need the funds from the sale of their existing home to finance the purchase or construction of their new one. How can this be managed while you’re still servicing a mortgage on your current home? A bridging loan could be an option.
What is a bridging loan?
A bridging loan is a short term loan - typically 6-12 months - which covers both the existing mortgage on your current home and the costs associated with buying the next one.
If you’re looking to upgrade to a newly built home, you might benefit from this type of loan. Bridging finance will allow you to remain in your existing home until you’re ready to move into your new one.
How do they work?
There are a few ways you can structure a bridging loan. It will depend on your unique financial situation, the equity in your current home and of course, the lender you choose.
One of the more common ways a bridging loan can be structured is as an additional loan on top of your existing home loan. This will cover the cost of purchasing your new home, before you sell your existing home. This means you will be paying interest on two home loans until you sell your current home.
Another way bridging finance works is through a loan using both properties as security over a designated period of time. This loan typically carries a 6-12 month term. During this period you may have to pay only the interest on the loan (i.e. no principal payments). Then, once you’ve sold your home, the proceeds from the sale will pay off part of the debt and you’ll revert to principal and interest repayments for the balance or enter a new loan arrangement.
What are the risks associated?
Of course, buying a property before you sell your existing home is not without risks and bridging loans often carry a higher interest rate. Their short term nature means that if you don’t sell your property within the loan term, you will suffer financially by having to pay large amounts of interest.
What you should consider with bridging finance
As is the case with any home loan product, you should consider the interest rate, any fees and features associated with the loan. If you think you may need to consider bridging finance, it’s essential that you seek professional advice.