Trying to sell your existing home before you buy a new home can be very stressful and so much can go wrong. Not least when your dearly beloved finds the property of their dreams and becomes desperate to make an offer. There are some very good options and some total disasters so please ask for advice before you go down this path.
For most people committing to the purchase of a new property before your existing property is sold is extremely ill advised and could cost you your home, your marriage and your sanity. Even if you are in a booming property market like Sydney recently where the average house sold in under a month, don’t forget that you have to be able to buy and settle within the settlement period of the first deal. Due to staff reductions many lenders processing today is slower than it was 15 years ago when everything was processed manually. DO NOT expect special service – it does not exist.
Even if the stars appear to align on settlements things go wrong all of the time – a valuation can show up an unexpected problem or your buyer’s circumstances change and their finance falls through ( it happens).
Your estate agent may assure you of a quick sale but they exaggerate both the market activity and the expected selling price just to get your listing. Anyone who tells you otherwise is either inexperienced or downright dishonest.
Why consider a bridging loan
Generally people buy the best house that they can afford and then over time their equity in the house increases, but even so for most people their current mortgage is still substantial. Therefore if you commit to the purchase of a new house it is likely that you could end up with two mortgages for a period and most people will struggle with that. What’s more you are going to struggle to convince a lender that you can afford to repay two mortgages because keep in mind that when calculating your borrowing capacity lenders will be using an interest rate about 2 percent above the actual rate that they are charging.
Even if you can scrape by, the pressure of two mortgage payments will eventually force you to consider lowering your selling price and this is money straight out of your pocket. Even if you can sell your house then you have to aim to settle that sale before the new property settles or aim for a simultaneous settlement – believe me that sounds easier than it is in reality and don’t expect your lender to turn around at the last minute and offer you a bridging option as many lenders simply don’t offer bridging at all and many of those that do can be very expensive.
Yes bridging can be expensive but it doesn’t have to be that way, there are some outstanding bridging products that can save you money and stress. The critical issues are:
- how much equity you have in your current home – it has to be at least 20 percent and preferably 30 percent. If your equity is too tight you move into the realms of LMI (mortgage insurance) and the premium will be calculated on the ‘peak debt’ even though that debt might only exist for a few weeks. In some cases 50% of the LMI can be refunded but not always.
- your income has to be sufficient to service the debt and this is where things become complicated. Many lenders will require you to service the ‘peak debt’ ie: the existing mortgage plus the full purchase of the new home although they will usually use interest only repayments for this. However they almost always charge the full standard variable rate which is about 1 percent above the market and some then add a premium immediately or after a few months.
Don’t despair there are better bridging options.
We have a few lenders who offer genuine bridging loans where your ability to service the debt is based on the ‘end debt’ ie: the amount you will owe after the existing house is sold. Some of our lenders not only do this but they offer there standard every day loans and standard every day interest rates ( no loading ) and some even offer fixed interest rates, with no break cost when you sell the existing house. Then as long as your equity position is strong enough … say 28 percent then they will allow you to make repayments on the ‘end debt’ and capitalise the interest on the balance. Of course you can may these interest repayments but the option is always there and so removes a lot of pressure.
Of course the capitalised interest is added to your loan and is a cost, but you have to compare that with the direct cost of discounting your existing property in order to get a quick sale.