Downsizing, moving home – is bridging finance the answer?
Often, once the children have moved out or our needs have simply changed, we can find ourselves in the market for a smaller home.
Selling one house and buying another may not seem that difficult on the surface, but there are some useful tips that will help make this transition as smooth as possible.
Many people worry about two scenarios:
- That they sell their home but then struggle to find the next one.
- More commonly, that they find their dream home but haven’t sold the one they already have.
Answering the first is relatively easy as you will always have the option of renting until they right house comes along.
This can be annoying because you may need to store furniture and other belongings, plus rent money is “dead” money but it does solve what is usually a short term problem.
The second dilemma can also be resolved by using what’s called bridging finance.
Bridging finance is exactly that.
It is a bridge to help you get from property transaction to another by providing you with the money you need to purchase a new home on the proviso that your existing one will soon be sold.
It means you are flexible to buy without having to wait to sell or enter into a potentially contract with messy and complex terms like “subject to the sale of your home”.
It can also make the moving experience a little easier – there are no immediate deadlines to vacate your existing house so you can begin moving at your leisure.
It also might allow you the time (and the room) to make any improvements to the new property before you must move in.
Bridging finance works in a similar way to home loan lending and there are no ongoing repayments required on bridging finance.
This can really help retirees who have reduced income at their disposal or home owners who have an existing loan on their current property that they have to keep paying off until its sold.
Remember, most lenders will require licensed valuations to be done on both your existing property and the property being purchased, to ensure there is enough equity across both properties to fund the bridging finance requirements.
Lenders will also generally require that you can provide evidence that you have entered into an agreement with a licensed Real Estate Agent, outlining that your existing home is or very soon will be on the market
As with most things there are some risks that you should know about.
You are still paying interest on the loan: interest is still charged and is capitalised to the debt at the end of each month.
This means you will end up paying more for the new property than if you waited to sell first and pay with cash.
You will continue to pay interest on the loan until you sell your house and so if it takes longer than you had planned/hoped to sell your house, you will still be paying interest.
This may end up eating into funds you had otherwise envisaged on using for something else
You may not get the price you want on your current house and could feel pressured into taking a lower price for your house, due to the urgency to sell and pay off your bridging debt off.
If you sell before you buy you might have the flexibility to hold off a little longer waiting for the better price.
Also if you don’t sell for what you had hoped/expected, there is the risk you might have a debt leftover after the bridging period.
It’s all about weighing up the risks and it’s worth speaking to your bank as early as possible to discuss what it going to suit you.