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Imagine you’re out enjoying a lazy Saturday afternoon drive, when you spot an open house sign on a home you’ve long admired. The curiosity is too much and you wander in for a look. But before you’ve even walked through the antique Balinese wooden front doors you’ve fallen in love.
It’s the type of scenario that explains why some homeowners buy before they sell.
But if you’ve seen your dream home and want to move quickly to ensure you don’t miss out then you may need to consider taking out a bridging loan.
What is a bridging loan?
As the name implies, it’s a short term loan that serves as a bridge between two transactions – in this case between the purchasing of a new property and receiving settlement funds from the sale of your existing home.
How a bridging loan works
The size of a bridging loan is calculated by adding the price of your new home to the amount owing on your existing mortgage, then subtracting the estimated sales price of your current home.
Then from a timings perspective, you usually have up to 3-6 months to sell your home. Once you’ve sold, the proceeds go straight into your new loan and you revert to normal repayments.
Advantages of a bridging loan
- A bridging loan can allow you to buy a new property before you sell your current home.
- You may be able to avoid the inconvenience of having to rent and moving twice.
- You normally have 3- 6 months to sell and settle the sale of your current home, meaning you may have slightly more time to sell and therefore the potential to get a better price.
Things to be aware of with bridging loans
- Interest-only repayments and capitalisation of interest that some lenders offer can assist in managing your finances, but remember you still have to pay both your current home loan and your bridging loan at the same time.
- If your home doesn’t sell within the bridging period, usually a maximum of 3-6 months, many lenders will begin charging much higher interest rates. They may also require you to start paying principal and interest on both loans, which can get very stressful.
- Bridging loans usually have an establishment or application fee.
Talk to an expert first
Bridging finance isn’t for everyone. You need to ensure it’s financially possible for you to manage two loans and that you could ride things out if things didn’t go your way with the sale of your house. If you’re on the fence, it’s best to talk to your lender and your accountant or financial advisor before you do anything.
At ING, bridging finance may be available if you’ve exchanged sale documents on your current home, but the settlement of your new purchase is scheduled to occur first.
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