Someone once explain bridging finance as this: as an old stone bridge takes you from one side of an obstacle, up and over it and finally to the other side, so does bridging finance.
Most of the time owners have an agreement in place to sell their current property before buying their next one. But it isn’t always possible to do this. Some are lucky enough to have sufficient income to service the existing and new loans at the same time. But for the majority they can only afford to service one loan.
So, is it possible to buy a property before you sell? Absolutely, with the help of bridging finance. Bridging is used to manage the transition between buying and selling properties. Each bridging finance application is customised to your situation.
You can purchase a new property without having to sell your existing property first.
If you’re building a new property, you can remain in your existing home until the new one’s ready.
A bridging loan term of up to 6 or 12 months, which gives you time to sell your home.
Not everyone qualifies for bridging finance.
The time limit on bridging finance (6-12 month) is a downside if you have trouble selling your home or settlement is delayed.
There are 2 different approaches from lenders on doing this.
The majority assess your repayment capacity on the “peak debt”
The minority will assess your repayment capacity on your “end debt” once the original property is sold.
An Example: You are living in a house worth $700,000 with a mortgage of $400,000 (meaning you have equity of $300,000). You want to upsize to a house worth $1 million.
Peak debt means servicing the original $400,000 and the new $1,000,000, $1.4m in total. This will be beyond the means of many. This is not really a bridging product, just two mortgages. However, there’s no time limit on selling the property.
End debt would be $700,000 ($400,000 from the original property and the additional $300,000 for the new property). This is much more palatable for most.
There is normally a maximum 6-12 months period (this varies by lender) during which the original property needs to have been sold.
Some lenders allow interest to be capitalised, meaning you can free the repayments on your bridging loan, leaving you only the home loan repayments to worry about. Others lenders insist that you at least cover your interest repayments.
Therefore, it is wise to establish what you can service before embarking on the project. Obviously, there is no point buying before selling if you think you will have trouble offloading your home. But if you are comfortable with this then we can help you find the lender to meet your needs.