How to Buy Your Next Home Before Selling Your Current Home

1. What a bridging loan is
2. The differences between types of bridging loans
3. The benefits of having a clear strategy for bridging loans
4. The risks associated with bridging loans
5. Alternatives to bridging loans

Understanding Bridging Loans

A bridging loan is a financial tool designed to bridge the gap when you’re looking to purchase a new property before selling your existing one. It allows you to buy a new home while you wait for your current home to sell. Typically, bridging loans are interest-only and come with special lender conditions and a limited loan term.

Types of Bridging Loans

There are two main types of bridging loans:

1. Closed Bridging Loans: These are ideal for borrowers who have already agreed on sale terms for their existing property and have a set date for the sale to settle. Once the sale is finalized, the proceeds are used to pay off the principal of the bridging loan.
2. Open Bridging Loans: These loans are for those who have found a new home but haven’t yet sold their current one. They typically have a loan term of 6-12 months and require a certain level of equity in your existing home and proof that it’s on the market. Lenders may charge higher interest rates for open bridging loans due to the increased risk.

How Bridging Loans Work

1. One lender provides loan funds for both the new and existing properties.
2. The total amount borrowed for the short period is known as the peak debt.
3. Repayments during the bridging period may cover one or both loans.
4. Once your current home is sold, the sale proceeds are used to pay down the loan balance, leaving the residual balance (ongoing balance or end debt).
5. The lender might offer to convert the remaining loan to a new product, such as a fixed-term loan with principal and interest repayments.
6. The repayment amount and interest rate on your remaining loan will likely change, so it’s crucial to understand the terms and conditions after the bridging loan period.

Benefits of a Clear Strategy for Bridging Loans

Having a well-defined strategy for using a bridging loan can offer several benefits:

• Immediate Purchase: You can buy your new home without waiting for your current home to sell.
• Avoid Renting: There’s no need to rent a temporary home between selling and buying.
• Flexibility: You have more flexibility in timing your move and managing the logistics of relocating

Risks Associated with Bridging Loans

While bridging loans can be advantageous, it’s important to be aware of the potential drawbacks:

• Higher Interest Rates: If you don’t sell your old home within the required timeframe, the interest rate on your loan may increase.
• Increased Debt: Interest costs can accumulate, and the overall level of debt will be higher.
• Additional Fees: Bridging loans often come with extra valuation, application, and loan fees.

Alternatives to Bridging Loans

Bridging loans aren’t the only solution for buying a new home before selling your current one or having to find elsewhere to live. Consider these alternatives:

• Longer Settlement Period: Negotiate a longer settlement period for your new home.
• Sell First, Rent Back: Sell your home and negotiate to rent it back for 3-6 months.
• Subject to Finance Clause: Include a ‘subject to finance’ clause in your purchase contract, making the contract for your new home conditional on selling your current home.

Conclusion

A bridging loan can be a useful tool to help you buy your next home without the inconvenience of renting in between. However, it’s essential to understand both the benefits and risks associated with these loans. Regular communication with your mortgage broker or bank lender is crucial to avoid any surprises and ensure that you secure the best possible terms for your financial situation. By having a clear strategy and exploring all available options, you can make a smooth transition to your new home. As always, feel free to contact us to learn more about whether bridging finance is right for you.