Bridging the gap: Buying a new home before you’ve sold the old one

ByAndrew Mirams
BridgingLoan

What is a bridging loan?

A bridging loan is a short-term solution to a common real estate situation: finding a new house before you’ve sold your current one. This finance provides the budget to purchase your planned property. You’ll then have a longer, calmer time to sell your current house and have a reliable cash flow in the process.

How bridging loans work

Lenders consider bridging loans as high risk so expect this finance to have high interest rates – either fixed or variable – and only six or 12-month terms. Depending on the lender, you’ll need to make regular repayments or pay off the loan in a lump sum when you sell your current home.

Types of bridging loans

Closed bridging loan

These loans have a fixed end date for repayment. They are generally for property owners who have exchanged sale contracts with a seller. But the sale hasn’t been fully completed. Closed loans are also useful for home owners with a definite settlement date for their existing and new properties.

Open bridging loans

Repayment for these loans isn’t fixed. Property owners will repay the loan when their current house is old. So, these loans suit owners who have not sold their current home or know when this sale will occur.

Pros and cons of buying before selling

Buying and selling at any time will always include benefits and risks.
  • Advantages
    Longer time to search for a new home  No temporary accommodation needed
  • Potential risks
  • Financial risks 
    Overestimating your current property’s price potential  Pressure to accept a lower sale price for your existing home Settlements – dates for current and new house may not work in your favour
  • Market timing risks 
    Are we in a buyer’s market? – with more supply than demand and lower property prices, it could be smarter to sell before buying and not vice versa

Financial strategies to consider

Bridging loans come with their own specific set of strategies to consider. Here are some to consider:

  • Using equity effectively

    Equity is your best friend when it comes to bridging finance as your lender will secure this finance against your existing home’s equity.  Generally speaking, you’ll need an equity of at least 20%, although every lender will differ. Below 20% and you may have to pay costly lender’s mortgage insurance (LMI).

  • Managing loan repayments during transition

    For lenders requiring bridging loan repayments, this finance is usually interest only. This keeps repayments low and manageable. Other lenders only want a lump sum repayment after you’ve sold your current property. 

How to qualify for a bridging loan

Apart from good equity, bridging finance generally need the same paperwork as ordinary loans.

  • Lender requirements

    Strong credit score and a reliable, stable income and employment history

  • Documentation and valuations

    Recent rates, utility notices, cash flow, and financial statements for current property  Current loan and mortgage agreements Punctual repayments on existing loan  Existing home is on the market, and you plan to sell within the bridging loan term Existing and new home’s sale values Required bridging loan amount (remember to include stamp duty, legal fees, moving costs and any renovations)

Tips for minimising risk

There are multiple risks in buying before selling. But that doesn’t mean it can’t be done. For a start, always speak to an expert about your situation, especially when it comes to equity.

  • Sell within the bridging period

    Regardless of your bridging loan and settlement terms, selling your current house as soon as you can should be your number one priority.  

  • Have a backup plan

    Remember that your current home is, in essence, your equity. So a back up plan is crucial, especially if your existing home sells for less than your new home. Or, if it takes longer to sell than you estimate.

  • Work with a mortgage broker

A good mortgage broker can help you avoid such a crisis. They can study important figures and numbers, including how much you should borrow. And a broker can advise you on how much to accept for your current home and what is reasonable for your new property.

When is buying before selling the right move?

Mortgage brokers can help decide if you should buy before selling or vice versa.

  • Market conditions

    Australia’s overall strong seller’s market is generally considered best for buying before selling. Generally speaking, the high buyer demand and growing values means buyers will snap up your current home quickly, for a great price.

  • Personal financial position

    Your equity as well as your credit score need to be in great shape for bridging loan approval. And the more savings and the less debt you have, the better.

Final thoughts

Whether you choose to buy before selling or vice versa, there are great benefits to enjoy – as well as risks to prepare for.

  • Making informed decisions

    Ensure you study current, and recent, market conditions – including prices – before beginning a bridging loan. The more you know, the less you’ll be unwittingly surprising by nasty shocks.

  • Seek professional advice

You should never begin a bridging loan before speaking to a mortgage broker, especially if you’ve been out of the market for years. Mortgage brokers will know the market and help you manage the transition between new and old homes – and loans. And they will keep you calm and cool throughout this process. So, if you’ve got questions or concerns, just reach out to us. Ready to move forward with confidence? Speak to a mortgage expert today and explore your bridging loan options.
Andrew Mirams
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