Buying Your Next Home but Haven’t Sold your Current One: Bridging Finance Basics

 

You may be upsizing, downsizing or just moving for one reason or another.  You can put your home on the market, sell it, settle and then rent while searching for a place or waiting for settlement on your next home.  A real hassle!


Alternatively, you can obtain bridging finance.  In simple terms, it means that your lender can increase the amount of your loan to cover the purchase of your next one before the sale, or settlement, on your current one.  On settlement of your original, funds are then applied to reduce the total loan outstanding.


Of course, over this period you will be paying out a lot more in interest payments, but it is usually for a short period such as six months for an existing property, or one year where a new property is being built.


One possible disadvantage with this facility is that if your home takes longer than expected to sell, interest repayments will be larger than expected.  Therefore it makes sense to build this possibility into your planning.  You will also need sufficient equity in your existing home to qualify for this type of loan.


Some lenders will charge a higher rate for this facility whereas others will simply apply their standard variable.  Also during the bridging period, most lenders will offer an interest-only option with the loan reverting to principal and interest once the funds of the sale have been applied to the total loan amount.


Some lenders will capitalise interest payments during this period.  This means you make no interest payments, with the interest amounts being added to the amount that you owe.  At completion you then recommence repayments which would be typically higher as the principal you now owe is larger.


Another alternative offered is keeping the original loan whilst taking out another to cover the new home. Repayments are made on both loans during this period and when settlement occurs on the first home, the original loan is paid out and any surplus funds are applied to the new loan.

I was buying my first home and was extremely an...

Kristin Gustavsson
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