It is a common dilemma vendor’s face when selling their home – sell before you buy, or buy before you sell?
In an increasingly hot property market sellers are having to work harder than ever at navigating the financial gap in the time it takes to sell their home and wanting to snap up their next.
A bridging loan – a short-term loan used to “bridge the gap” between buying one property and selling another is often an overlooked option.
With volatile inflation and rising interest rates, buying and settling on a new home prior to selling is the type of flexibility buyers should seriously consider.
“It gives you flexibility in not having to rush on a settlement date and moving house to house, and that can be quite stressful,” Brisbane-based Mortgage Choice broker Laura Nadal says.
“You can take your time selling as well, so you're not forced to sell at a ridiculously low price.”
A bridging loan is typically available for a period of 12 months and works by offering credit to cover the time gap between homeowners purchasing a new home, before selling their existing residence.
Bridging loans generally last 12 months, though sellers often want shorter timeframes. Picture: Getty
It sounds promising, but it can come at a cost.
“The interest rate you have to pay is the full interest rate on a bridging loan, plus your existing loan which can be quite a lot covering two properties,” Ms Nadal warns. “It’s a really high percent interest, but it's only for short term.”
In the current market, Ms Nadal says use of bridging loans is “more and more common”. With the market at the mercy of a new tightening cycle, Ms Nadal is typically seeing bridging loans with short periods of a month or less.
“When you sell a house, it's so quick at the moment, and for a lot of people why they prefer a bridging loan is because with this rising market, they get to secure a property that they like without being homeless,” she says.
Homes change hands rapidly across the nation. Picture: Getty
“For people who own a property already, they have a lot of equity, so it allows them to be able to do this transaction – and it's more so because they can't finance the full debt by having two properties – but they have to sell one house, and buy another because it's so expensive.
AMP head of investment strategy and chief economist Shane Oliver says there are huge advantages to using a bridging loan in the buying and selling process.
“I guess it smooths the transaction process to some degree,” he says.
“The downside, of course, is that you can be vulnerable if you don't sell your own property, or it is sold at a price which is well below what you wanted.
“There's always this risk that the property market could deteriorate from the time you bought the property you want, and use bridging finance to do that, (and) then the value of your own property could fall.”
Being wary is crucial, Mr Oliver says, and users should consider the vulnerable position bridging loans place you in.
Typically, a bridging loan’s interest rate ranges between 6.5% to 9.5%, which is 1% to 3% higher than a typical home loan.
“Bridging finance comes with a much higher interest rate than traditional mortgages,” Mr Oliver warned.
“It is costly,” Ms Nadal agrees. “It is going to cost thousands of dollars every month.”
The longer your home stays on the market, the more you also pay on your bridging loan.
There is also a limit to the number of lenders who often bridging loans, meaning buyers often need to look beyond their existing options.
When using bridging loans, Ms Nadal says it is important to be realistic about the market you are selling in.
“You've got to prepare your property as much as possible before you sell, so then you're not wasting time,” she advises.
Mr Oliver says sometimes it might reach a point in the selling process that you become desperate to sell because of the bridging loan.
AMP chief economist Dr Shane Oliver. Picture: Supplied
“Then psychologically, you're under more pressure to sell, which might mean you end up selling your own property at a discount, potentially relative to what you might have otherwise got,” he explains.
“So you've got to be careful… particularly around times when interest rates are rising, and there is the risk the property market might slow.”
For buyers needing a bridging loan as a buffer, having a broker who can crunch the numbers for you can ensure piece of mind.
“It's not something really that you can do by yourself,” Ms Nadal says. “You need an expert to guide you.”
This article first appeared on Mortgage Choice and has been republished with permission.
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