Tuesday 01 May 2018
When thinking of relocating, either to downsize, upgrade or to move interstate, a question often asked is:
“Do I sell first then buy, or do I buy first and hope I sell during my settlement period?”
Bridging finance may be an answer to this.
But, what exactly is bridging finance?
Bridging finance is a loan structure that allows you to fund your new purchase whilst selling your current home. Bridging finance, often called ‘a relocation loan’, lasts between 6 to 12 months, depending on the lender.
There are three types of debt that is referred to with bridging finance:
Where the total debt that you are holding includes:
- Your current loan balance
- Purchase price of new property (less deposit paid)
- Stamp Duty
- Interest of bridging period.
The loan balance after the sale of the property and all costs have been paid.
No End Debt
Your debt is nil after the bridging period. This is quite common if you are downsizing.
How much is bridging finance?
Bridging finance used to have a premium rate and was quite an expensive option. Now, bridging finance is subject to the standard variable rate. After settlement this will be reduced based on the lender and discount offered and the loan amount.
What are the pros?
- It enables you to buy the house you love now and saves you possibly moving twice
- Gives you 6 to 12 months to prepare your home for sale to achieve the maximum price possible
- Reduced interest only payments or sometimes no payments at all during the bridging period with the flexibility of making extra repayments with no penalty any time
- Rates are no longer inflated.
And the CONS?
There are some points to be aware of during the bridging finance process, so please make sure you consider the following:
- Interest rate accrued on peak debt during the bridging period
- Higher application fees and valuation costs (some lenders my charge for an extra valuation)
- Limited lenders – not all lenders offer bridging finance
- Consulting a broker is a must
- Some lenders will assess your borrowing capacity on your peak debt which can be quite hard to qualify for
- Some banks reduce the valuation to allow for a fire sale
- Bridging finance is not uncommon, but can be quite complex, so by having a broker who can talk you through the process and see if you qualify is crucial.