It’s best to sell one property before buying a next, right? Not necessarily.
What if you find your dream property before your finances can handle the purchase outright? Well, you have two choices. The first is to wait until you can get the funds together and hope that no one else takes it off the market. The second option is to contact a 1st Street for a bridging loan.
Bridging loans, or relocation home loans, will let you buy your ideal property before you have sold the existing one. When there is a financial gap between sale and purchase, a bridging home loan can help to close this gap. They can also supplement finances for building your new home before moving out of the current one.
For a bridging loan, lenders will take the security of both the original and new property and lend against them until the sale can be made. Most lenders will offer a six month period to sell the home. If you choose to build a new home, most lenders will extend this period to twelve months. During the gap period, the repayments may be interest-only, depending on the lender, and the rates are generally comparable to or slightly above the standard rate.
In essence, bridging loans allow you to tap the equity of your current home to get a quick injection of cash to help buying or building. Some lenders will allow you to capitalize on this loan, meaning that you will not have to make loan payments during the bridge period. You will own both properties at once until the purchase and sale are completed.
Once the sale has been made, the money is applied to the bridging loan. The remainder then becomes an end loan, or a basic home loan for the new property. If the interest rate was higher than standard variable, these rates will often drop to the standard variable upon completion of the sale. If you have chosen to capitalize the bridging loan, then the new home loan may be slightly higher.
Though bridging loans are slightly more expensive than traditional mortgages, they are still quite affordable. They also allow a buyer to take advantage of openings in the market; however, there are a few risks involved. If the sale falls apart, then the purchaser may be saddled with two mortgages at once. Also, you will want to make sure that your lender will approve you for a bridging loan before going ahead with the purchase. Most bridging loans will require a strong credit profile, or force you to recourse to private lenders with higher interest rates. It’s best to consult a 1stStreet home loan specialist to develop a plan that takes all financial factors into consideration.
Before meeting with your 1stStreet mortgage broker, consider how long you will need the funds and whether or not you will be able to make repayments during the bridging process. Have you acquired an unconditional contract for the sale property? Is the bridging loan for an investment property or for a home? The more our home loan specialist knows about your financial situation, the better able they will be to assess how much you can borrow and which bridging loan will suit your circumstances best.
When it’s time for you to consider a new purchase, feel free to contact us. At 1stStreet, we’re dedicated to helping you find the loan that’s right for you.