The property market is going crazy right now, with CoreLogic recently reporting that prices are growing at their fastest pace since 1988.
Sydney’s median property price jumped 6.7% in the first three months of the year, according to CoreLogic.
Meanwhile, asking prices for Katoomba houses climbed 8.5% between March 2020 and March 2021, according to SQM Research.
With prices rising so fast, it’s hard to know whether you should sell before you buy or buy before you sell.
How bridging loans work
If you sell first, you’ll find it easier to finance your next purchase. But in a rising market, delaying your purchase by several months could force you to pay tens of thousands of dollars more for your next home.
If you buy first, you’ll get ahead of future price rises. But where will you find the money to fund the purchase?
The answer, potentially, is with a thing called a ‘bridging loan’, which is a second mortgage designed to help people buy before they sell. Here’s how it works:
- You take out the bridging loan / second mortgage
- You use it to buy your second home
- Initially, the loan is interest-only, with the interest capitalised (i.e. added on) to the second mortgage
- Your sell your first home
- You use the sale proceeds to pay off your first mortgage
- Your bridging loan now switches to a standard home loan, with standard repayment terms
As with any loan, banks don’t just hand out bridging loans – to receive one, you need to provide the usual documents and pass the usual creditworthiness test.
Bridging loans differ from lender to lender, but typical conditions include:
- The standard interest rates and fees apply
- You have 6-12 months to complete both transactions
- You can borrow up to 90% of the ‘peak debt’ (your current mortgage plus the purchase price of your new home)
The pros and cons of bridging loans
Bridging loans will be suitable for some borrowers, but unsuitable for others, so it’s important you carefully weigh up the pros and cons before you go down that path.
Bridging loans have several potential positives:
- In a rising market, you get to buy ahead of price increases
- You can take your time selling your current home
- You can move straight from your current home to your new home (thereby avoiding the cost and hassle of moving to an interim rental property)
They also have several potential negatives:
- You may need to pay for two property valuations (for your first and second properties)
- The longer it takes to sell your home, the more interest you’ll get charged
- If you don’t sell your home during the bridging period, your interest rate may be increased and you may be forced to switch from lower interest-only payments to higher principal-and-interest payments
Another way to use bridging loans
Most people use bridging loans so they can buy first and sell later. But there’s another way to use bridging loans – to pay for the construction of a new home while living in your existing home.
This is something I recently did myself. It meant I could move straight from my first property to my second, without the inconvenience of finding somewhere to live during the construction phase.
Need a bridging loan? Just Imagine Finance can find you the right bridging loan that suits your personal requirements. Call us on 0414 673 359 or book a call by filling out our online form.