Did you know it’s possible to buy a new home before selling your existing one, even if you don’t have a large stockpile of cash?
This can be done by using what’s known as a bridging loan or bridging finance.
A bridging loan is a short-term loan that you can use to buy your new home. You then sell your existing home and use the sale proceeds to pay off the bridging loan.
How does a bridging loan work?
Consider this hypothetical scenario:
- Your current home is valued at $700,000.
- Your current mortgage is $300,000.
- You decide to buy a new home for $1 million.
Therefore, you would need at least $1.3 million of finance – $300,000 to cover your existing mortgage, $1 million to cover the purchase of the new home, and possibly some extra funds to cover stamp duty and other transaction costs.
This is known as peak debt.
At this stage, your loan would be interest-only. Depending on your scenario, you would either pay interest directly to the lender or your interest payments would be capitalised (i.e. added) to your peak debt.
Once you sell your current home, the sale proceeds would go to the lender, thereby reducing your outstanding loan.
This is known as end debt.
At this stage, your end debt is usually converted to a standard principal-and-interest mortgage.
Bridging loans generally incur higher interest rates than regular home loans. Also, there are risks involved – mainly that you can’t be certain how quickly you’d be able to sell your original home or for what price. But bridging finance can be a very useful solution under certain circumstances.
Want more information about bridging loans? Want to know if they’re right for you? Want to know what costs would be involved? Get in touch and let’s chat.
Reach out to your Loan Market broker for more information about bridging loans and to determine if it is the right strategy for you.
