If you’ve bought a new house before selling your old one, a bridging loan could tide you over until you make a sale.
It’s an age-old property dilemma. Buy or sell first? Many people are scared at the concept of buying one home while selling another. Such an event is rife with uncertainty and raises a host of questions: How much is my house worth? What if I buy and find that property valuations of my existing home are lower than expected? What happens if my old home doesn’t sell in time? What happens if my old home is sold too soon and a new one hasn’t been found?
For those already in the property market who decide to buy a new home before selling their old one, a bridging loan can help ease the transition. Bridging loans can offer homeowners the option of moving into a new home, while the old home is still on the market.
Normally the lender will undertake property appraisals to assess the property value and level of equity in the existing home and may decide to deposit the entire purchase amount plus fees on the new home. This allows the purchaser up to six months to sell the old home while living in the new home and avoiding the hassles of missing settlement dates.
However, there are some disadvantages with bridging loans. Because it is a short-term loan, interest rates are generally much higher than the standard variable rate charged. This means that, for a period of time, payments will need to be made on two loans while the homeowner waits for the old property to sell.
Mortgage broker Bill Mangafas, franchisee of Aussie Narellan, says some lenders may offer the option of capitalising interest payments into the home’s equity. “This can help avoid the trap of having to pay two mortgages at once, but the loan amount can balloon while payments aren’t being made,” he said.
“In an ideal world, the procedure of buying and selling houses should be in sync,” he said. “But we live in the real world, and sometimes things don’t go according to plan.
“Bridging loans are a good fall-back option when that doesn’t happen.”