Bridging finance: how to buy a property before you sell
Is it possible to buy a property before you sell? Absolutely!
I've done it but it wasn't without a few butterflies.
You've got to be confident that your property will sell and that it will sell in record time.
If you can't engineer a simultaneous contract settlement, then you need to be certain that your lender has a true bridging finance product and doesn't just simply slap two mortgages together.
If they do, it could cost you the approval.
First things first. There's no point buying before selling if you think you will have trouble offloading your home.
Most experts measure the health of the market by auction clearance rates.
But Angus Raine, executive chairman of Raine & Horne, says a truer indication is "days on market" - the time between a property hitting the market (the listing) and an offer being accepted.
In Sydney, for example, Raine & Horne's figures show the days-on-market indicator is running at 30 days per property on average.
If you were to look at days on market across all sales from CoreLogic RP Data, Sydney has been sitting on an average of 49 days over the past 12 months.
Brisbane is on 68 days, Melbourne and Perth are both on 64, Canberra is on 70 and Darwin is on 95.
"If the days on market are short, as is the case with Sydney and Melbourne real estate, then it's appropriate to label it a seller's market," says Raine. "In contrast, in the dark days of the GFC days on market for housing in NSW's Southern Highlands and Canberra were closer to 350 days."
Whether it's a buyer's or seller's market in your area, Patrick Bright, a buyer's agent from EPS Property Search, says if your home is priced right - around the medium price for what it offers - then it shouldn't take any longer than one to two weeks.
Having said that, he says it can depend on its appeal.
"Most homes that sit around more than two weeks in a seller's market are either poorly marketed, have a less than good sales agent or are overpriced or there's a combination of those points."
The typical settlement period is about 42 days. If you've already bought another property by drawing out the equity in your home loan, as I did, you could buy yourself some more time to sell your home by delaying settlement.
The other party will, of course, have to agree to this. Bright says six to 16 weeks is common, although the longest he negotiated is nine months.
Most owners buy before they sell with the help of bridging finance. The trap here is that if your lender simply offers you two mortgages, you may not be able to prove on paper that you can afford them both.
"It's what brings people unstuck," says Michael Daniels, state manager for Smartline Personal Mortgage Advisers.
"A few lenders do bridging finance really well but many don't. That's why a true bridging loan product is really the way to go."
He gives this example. Say you're living in a house worth $700,000 with a mortgage of $400,000 (meaning you have equity of $300,000). You want to upsize to a house worth $1 million.
Those with a true bridging loan will assess your repayment capacity on your "end debt" once the original property is sold.
In this instance, that would be $700,000 ($400,000 from the original property and the additional $300,000 for the new property), not $1.4 million, which could be hard to service.
With true bridging finance, there is normally a maximum time period of around 12 months - the original property needs to have been sold and settled in that time. A full valuation - not just a desktop valuation - will be carried out by the lender to ensure that the original property is saleable.
Daniels says lenders without a true bridging product will assess your repayment capacity on the "peak debt", which would be $1.4 million ($400,000 from the original property and $1 million for the new one).
You effectively need to be assessed as being able to afford double the amount, which is massive. This is not really a bridging product, just two mortgages. However, there's no time limit on selling the property.
As for repayments, that depends on your lender and your equity.
Some allow interest to be capitalised, meaning you can free the repayments on your bridging loan, leaving you only the home loan repayments to worry about, while others insists that you at least cover your interest repayments.
If your lender doesn't offer you a true bridging loan, it could be worth refinancing with another one that does. Multiple credit card and personal loan repayments each month can be a headache to manage, and cost you unnecessary interest and fees. Consolidating debts can reduce stress and hassle by moving to just one regular repayment.
To start, look at your whole financial situation to understand what debts you have, how much you owe on each, how much interest you currently pay and any additional fees that may apply.
Work up a detailed budget to understand how you are spending your money and whether a personal loan could help simplify your financial situation.
Once you've worked out how much you owe and what you could afford, a comparison site like Canstar can then help you to find the right personal loan to help pay off your debts sooner.
Consolidating debt into one competitive personal loan can offer peace of mind in knowing what you owe each month. With interest rates at historic lows, consider one of the great fixed rates on offer at the moment so your repayments won't increase during the loan term.