Sell now or wait? It can be hard to know what to do but it helps to know your options.
Here we look at what's involved in a bridging loan to help you navigate what will be suitable for your circumstances. There are pros and cons to this scenario, and we look at each.
Homeowners have experienced an unpredictable time of late and if you are considering selling your home but not sure what to do, this article is for you.
Part of the decision around when to sell a house, if it's your principal place of residence, is knowing where you're going to head next. For many, the current rental crisis, which is at an all-time high, gives concern about not having somewhere else to move to when you move from your home. Is it better to pay a higher rent, or is there another option, allowing you time to find and purchase your next property while you list your current house for sale?
For those considering buying while they sell, the solution that may be suggested to you is a Bridging Loan.
If appropriate for you, this can be the path you need to take to feel comfortable selling your house. Your mortgage broker will be pleased to talk you through how the following specifically applies to you, but here's a brief overview to get you started.
Within, we cover:
What is a Bridging Loan?
Let’s say you’ve found the property but haven’t sold the one you’re living in. The bridging loan will be a short-term loan that will cover the amount of your existing loan and your new property's loan and financing costs. The total amount borrowed is called your Peak Debt, which the borrower needs to demonstrate capacity or cash resources to cover during the bridging loan term. Then there is the Post Bridging Debt or the ongoing debt after the property is sold.
How are costs for a Bridging Loan calculated?
In determining your repayments on a bridging loan, the lender will calculate your existing loan, your new loan amount and additional financing costs such as:
-stamp duty
-legal fees
-lenders fees
The minimum repayments on a bridging loan will generally be calculated on an interest-only basis, and typically you need to show capacity to meet payments during the peak borrowing period. If you have additional equity, this could potentially be borrowed from the outset. This can also be a more cost-effective approach as you only pay interest on what’s drawn.
When is a bridging Loan repaid?
Once the sale property has gone through, there will be a required debt reduction. These amounts are set at the approval stage. Should you sell your property for more, you can opt to pay down more of the Post Bridging Debt than originally approved.
What is the term of a Bridging Loan?
Generally speaking, the loan term is 12 months for the Peak Debt, then up to a 30 year term for the proposed Post Bridging Debt. Should you sell your property sooner, this term can be shortened as you need. Naturally it will save you interest costs to have the bridging portion paid out sooner rather than later, so moving quickly to sell your property is the key.
How do you pay out a Bridging Loan?
Once you receive formal approval for the bridging finance, there will be a minimum debt reduction required with the sale. It's important to pay close attention to this, as it will restrict what you can sell the property for.
Buyer beware- Bridging loans aren't for everyone
It's important to consider that bridging loans have higher costs. Typically, in committing to take on the financing of two mortgages, a lender will seek a higher interest rate. The other costs will be general transaction costs, which must be weighed against the likelihood of selling your current property. In some cases, simply taking a lower price for the property you are selling, equal to the potential costs of bridging finance, could make your life much less stressful.
What if I don't sell my property within the timeframe?
In the event that you don't sell your home, it's possible that following the end of your agreed-upon term, your lender will charge a higher interest rate. Many will also require you to start making principal and interest repayments on the peak debt to service both loans.
Where to for you?
In reading this, if you feel you'd like to know how this scenario may apply to your circumstances, reach out to us to find out more. We'd be happy to discuss your scenario. It may be that this isn't the right for you but there will be one out there, and it's our job to help you find it. Contact us to know More.
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