Top tips for bridging finance

Top tips for bridging finance

Selling your home and moving to a new one in the same timeframe can be a tricky business.

A bridging loan is a short-term loan that can tide you over between transactions if you’ve found your new dream home, but have yet to sell or settle on your old one.

Alternatively, bridging finance can be used if you’re looking to build, and continue living in your old place until the new dwelling is complete.

Being able to buy again before you sell can mean you’re not on the clock to find a new place once yours is under contract, or having to face the expense and disruption of going into rental accommodation while you wait for the perfect house to come on the market.

Bridging finance can also eliminate the need to sell your home in a hurry, and make the business of trying to coordinate settlement dates less stressful by providing some breathing space to get things sorted.

How does it work?

If you take out bridging finance, your total borrowings are likely to comprise the value of your new home plus the outstanding mortgage on your original dwelling, less its anticipated sale price.

Bridging loans are commonly offered on an interest-only basis, but it’s likely you’ll be charged a higher rate than that on a standard variable loan with the same lender. Interest is compounded monthly on your outstanding loan balance.

In order to qualify for bridging finance, you’ll need to demonstrate you have significant equity in your home, as well as the capacity to service your increased borrowings.

Open or closed?

Bridging loans come in two forms – open and closed.

A loan is considered to be ‘open’ if you’ve yet to sell your existing property. Typically, the terms of your loan contract will give you six months in which to do so.

If you’ve signed a contract to sell but are unable to finalise the sale before your new home settles, your loan is generally considered to be ‘closed’.

Thinking it through

While bridging finance has its benefits, borrowing for two properties concurrently is not without its risks and it pays to consider your options carefully before you go down this path.

Your biggest risk is likely to be the possibility your original home won’t sell for the price you want or need it to. You may be forced to let it go for a lesser sum, in order to comply with your bridging loan obligations. This could leave you with a shortfall in funds for your new home.

Alternatively, your lender may increase your interest rate if you fail to sell your original home within the bridging period and have to seek an extension. They might only make interest-only payments available for up to 12 months, after which it may revert to principal and interest payments until you sell your original home. These additional repayments could result in financial stress and a burgeoning loan balance.

It makes sense to crunch your numbers and consider how you’d manage financially, in the event your sale process doesn’t run to plan.

This will help you decide whether the convenience of using bridging finance outweighs the risks of buying and selling concurrently and the interest bill on your increased borrowings.

Professional help

Borrowing funds temporarily to cover a second property can be a big step. Your Smartline Adviser can talk you through the options and work with you to secure the finance that’s best suited to your individual circumstances.

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DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.