The traditional way to upgrade is to sell the old home first, move into a rental, and hope the dream home is still available months later. Bridging finance allows the purchase of a new home now before selling the old one and owners only need to move house once.
There are many advantages to using a bridging loan to upgrade but there are some risks and borrowers must have equity in the existing property to make it happen.
How does it work?
The bank will refinance the existing loan and provide the extra money needed to purchase the new home. Temporarily the borrower will own 2 houses. The keys on the new house are handed over and moving house can be made gradually.
The old home becomes empty making it easier to get ready for sale. Once ready, it is sold as a vacant possession which often sells quicker than an occupied house.
When it is sold, debt is reduced accordingly and only the one house with the one loan remains.
Is it expensive?
Decades ago, bridging finance was extremely expensive but times have changed. Unfortunately it still has a reputation of being expensive but the truth is the complete opposite.
Some bridging loans are over 1% cheaper than standard variable rates. They can also be at a lower interest rates than normal loans. Not very expensive at all.
What are the risks?
If the property doesn’t sell within the required timeframe, principal and interest repayments on the full amount of debt is required. Therefore careful consideration of the saleability of the property should be made.
The single biggest risk factor is unrealistic expectations of property values. Vendors not prepared to meet the market are more at risk than vendors who aim for market value.
Engaging a licensed Real Estate Agent, actively marketing the property and having reasonable expectations of market value will mitigate most risks associated with bridging finance.
How do I qualify?
Sufficient equity in the existing home is necessary so that the total debts do not exceed 80% of the combined value of both homes.
|Debt type||Debt amount|
|Existing Home Value||$400,000.00|
|Existing Loan Balance||$200,000.00|
|New Home Price||$600,000.00|
|Total Loan Required||$800,000.00|
|Total Home Values||$1,000,000.00|
Once existing home is sold, the loan will reduce from $800,000 to $400,000. The bank will assess your capacity to repay a loan of only $400,000 not $800,000.
Do all Lenders offer bridging finance?
Many banks have a “Bridging Loan” but this is sometimes just a normal loan with a different name and most banks will only provide this type of loan to existing customers.
There are only a very small number of lenders offering a genuine bridging loan where ability to repay is based exclusively on the end position post sale.