Upgrading or downsizing from your present living situation is a process with many aspects to consider. Buying and selling in a market that is always changing comes with a level of uncertainty that is difficult to predict. When you find yourself in this buy-before-you-sell situation, taking all options into account is the best way to come out ahead, with minimal loss.
At first glance, the option of a bridge loan may seem like a risky method when buying a new property, particularly when sale price and sale timing uncertainty looms over your head with your current home. With the guidance of Brickfloor, you can eliminate this risk and alleviate the stress that comes with it.
What is a bridge loan?
As the name suggests, bridging loans (also known as interim financing, gap financing, or swing loans) help while you are in transit between current and future financial obligations.
A common example is one that allows you to purchase a new home before your current house has sold. For many people, discovering a new home to purchase happens before their current property has been sold on the market, making a bridge loan a viable short-term option. There are two types of bridge loans:
- Open bridging loans. These are used if the current home has not been sold or isn’t on the market yet. Open loans usually have a term of up to 12 months. Due to the higher risk involved with this type of bridge loan, lenders are much more hesitant to approve them and have stricter lending criteria, such as requiring you have an exit strategy secured for if your property doesn’t sell, and that there is a large amount of equity to draw from in your current home.
- Closed bridging loans. These are used if your current home is under contract with a fixed settlement date. Closed loans have a time frame, usually 6-12 months, during which your property needs to be sold.
With these loans, the lending amount is determined based on the mortgage owed on your current property, as well as the necessary amount (including closing costs) to finance your new property. This total amount is called the Peak Debt. After your existing property is sold, the proceeds are deducted from the Peak Debt, leaving you with the remaining amount owed – the End Debt.
The pros and cons of a bridge loan
Bridge loans are often viewed as unpredictable because they rely heavily on the sale of your current property. Some cons of a bridging loan include:
- Fire sale or penalties – If the sale of your home falls through, you could be required to quickly find another buyer (at a lower than expected price) or you may incur penalty fees if you need to extend past the predetermined end date.
- Higher cost of borrowing – Many bridge loan lenders may not offer discounts to standard variable rates, which means your cost of borrowing may be higher than a normal loan with a normal discount.
- Interest on top of interest payments – Many bridge loans are interest-only, but if you decide not to make any payments during the course of your bridge loan, the interest will carry over, and you will have to pay additional interest on the interest.
- Higher fees – If you are downsizing and there is no End Debt, meaning you will have nothing owing after the sale of your home, a lender may choose to implement higher loan fees.
- Lower loan amount – Lenders will normally add a six-month interest rate buffer when assessing your ability to pay off the bridging loan. They’ll also discount the projected sale price of your existing property by around 15%, otherwise known as a “fire sale” buffer. This can have an impact on your borrowing power.
On the other hand, in some cases, buying before you sell can be a smart financial decision. Here’s how a bridge loan can help:
- Buy your new home straight away – You can secure the home you want without waiting for your current home to sell and risking that it may no longer be available, or may be more expensive. It also gives you time to get a better price on your current property.
- Avoid the risk of being left out of a rising market – Buying first when property prices are rising or when there is a limited supply of homes on the market makes sense. If you sell first, you may be left out of a rising market and struggle to buy back if there is limited home supply.
- Avoid the costs of renting and moving twice – Being able to move into your new home before your old one has sold gives you peace of mind knowing where you are moving to and means that you save on the time, money, and effort of finding and moving into a rental while you search for a new property.
- Capitalisation of the interest – Some lenders allow the delaying of bridge loan repayments until your fixed end date, meaning you have a small amount of financial wiggle room if needed.
Often, buying first makes sense, provided it can be done safely.
When you’re deciding whether or not to apply for a bridge loan, it’s essential to know the requirements of the lender. While each lending institution is different, many have similar requirements, such as a minimum amount of equity needed in order to apply, or a maximum loan term length.
If you already have a current home loan, it is advisable to speak with your lender about a bridge loan.
How does Brickfloor make bridge loans safe?
If you’re ready to purchase a new home but haven’t yet sold your current one, Brickfloor can help take the uncertainty out of your bridge loan. Our Market Price Guarantee means you can enter into your new home loan with ease, knowing that you have a fixed sale amount for your old home.
As part of our guarantee, we can provide the minimum amount that we will purchase your property from you before you commit to buying, and you receive all upside if your home eventually sells for more. This will enable you to:
- Safely take on a bridge loan
- Determine what is safe to spend on your next home
- Have smooth discussions with lenders and mortgage brokers about what you will sell your current home for
- Avoid a “fire sale” (selling your property quickly for less money)
- Buy with confidence
With our Market Price Guarantee, you’re free to choose your real estate agent, run your sale campaign, and accept the highest offer that you receive. This is all done with the comfort of knowing your home will be sold at a price that is acceptable for you.
By removing the risk of selling for a low price, or not selling in a reasonable time frame, a bridge loan becomes an easily accessible and safe option for buying your new home before you sell.
Refer a friend
Know a homeowner who may benefit from Brickfloor’s Market Price Guarantee? Contact us to refer a friend and you will receive $1,000 cash if they take up a Market Price Guarantee.
