Bridging Finance

1. What is Bridging Finance?
2. Example Scenario
3. Lending Considerations
4. Problems that Occur
5. Recommendations from Vision

What is bridging finance?

Bridging finance when you are buying one property before you sell an existing property.

The example below gives a better understanding.

It arises in the following example – this is the CLASSIC case that arises regularly:

Mr and Mrs X own the home they live in he lives in worth $500k and they have a home loan with a balance of $150k owing – lets call it Property A
Mr and Mrs X need a bigger home – and they start looking around for bigger properties
Mr and Mrs X find a dream home which is for sale for $600k – lets call it Property B
Mr and Mrs X decide that they want to buy Property B
They also decide to sell Property A – but it is unlikely the sale will go through before the settlement of Property B
Mr and Mrs X will now need a loan of approx $630k to cover the purchase of Property B plus purchase costs (stamp duties, etc)
Mr and Mrs X will have a PEAK DEBT of $630k + $150k = $780k
Mr and Mrs X then sell Property A for $500k – and after they pay the real estate agent, solicitor, etc – they are left with $485k
They now paydown their $780k loan – they now have an END DEBT of $780k - $485k = $295k
Mr and Mrs X now have an END DEBT of $295k

Lending considerations

Main points for you to consider:

The lender needs to approve you for both the PEAK DEBT and the END DEBT
You will need to understand the length of time the lender gives you to sell your existing property.
The time is generally measured from the date the new property is advanced till the time that the existing property settles. Some lenders will say 6 months, others 12 months.

Problems that occur

Bridging finance becomes a problem when you have issues selling your original property in the time allowed.

It is important to allow yourself enough time for all the paperwork to go through. A rough rule of thumb is that if the bank gives you 6 months, then you need to have accepted an offer no later than the 4 month mark.
The longer it takes to sell your existing property – the more interest you are incurring on your PEAK DEBT – which can become costly even though most lenders allow you to capitalise the interest for a period of time

Recommendations from Vision

1. Try and avoid a bridging finance situation if you can

2. If you can’t avoid it – you must obtain an unconditional approval from a lender prior to signing anything

3. Get your existing property ‘ready for sale’ as quickly as possible

4. To save money, try to negotiate a delayed settlement on the new property. This will save you interest as you will have the peak debt for a shorter time period