A bridging loan is a loan to assist you in purchasing a new property before you’ve unconditionally sold your existing property. This loan remains in place until the existing/old home is sold, and then you are left with the difference as your new mortgage. This can be either when upsizing, or downsizing.
How a bridging loan is set-up will be dependent on a few factors, particularly your current LVR situation, and how long you need the funds for. You will need to consider the following things:
- How much will you pay for the new property?
- What will your existing property sell for, and what are the selling costs that will relate?
- How long do you need the funds for, and how long (realistically) do you need the funding for.
- You’re better to over-estimate here than underestimate – or the mistake could be costly.
The amount of the bridging loan is usually the existing debt plus the proposed new purchase price, and combined they must be within an appropriate LVR, for either a bank or a non-bank to look at the deal. The lower the LVR during the bridge (overall), typically the more options you have. Once you have the idea on the figure, you can then calculate if this is going to be affordable. Bridging loan payments are typically interest only, and once the existing/old property sells, will go back to being a regular loan (typically table/principal & interest if it is an owner occupied property).
The risks to consider are:
- That you don’t sell your existing home within the nominated time period, or you over-estimated your selling price, leaving you either with a significantly higher debt position, or if the lender forces you to sell, it means you are in a position where you lose money on the selling price.
- During the bridging period you are typically covering two mortgages without income because you don’t have it tenanted while it is marketed for sale.
- The fees associated with this type of finance can typically be higher than standard mortgage lending, particularly when looking at non-banking options.
The benefits of a bridging loan are such that you can move on a purchase before you are otherwise in a position to do so – typically when you find a property you’re emotionally invested in – such as your new dream home coming on the market. Another benefit is the ability to stay in the market – when property values are rising rapidly, as they were relatively recently in Auckland, people found that if they sold and then tried to buy, they were unable to get back in to the market at the same level due to prices rising so quickly.
The best way to protect yourself from these risks are to market your property for sale ASAP. The next step would be looking at having the longest possible settlement period on the house you’re trying to buy – in many cases vendors are happy to be accommodating here.