Buying and financing a new home can be a daunting prospect at the best of times, but what happens if you already have a house (and a mortgage) that hasn't yet sold? Most buyers will be relying on money from the sale of their existing house to finance the construction or purchase of the new residence. So how can you go ahead with a new purchase while still servicing an existing mortgage? The answer could be a bridging loan.
What is it?
Bridging loans, quite simply, are short-term loans, usually for a period of 6 to 12 months. They will cover both your current home loan as well as the financing required to purchase the new house.
Bridging loans are particularly common among people who want to build a new home. The benefit for them is that they can stay in their existing home until the new house is ready.
How does it work?
There are some key elements that will determine how bridging loans are structured - equity in your existing property, your particular financial and credit situation, and your lender of choice.
A common structuring method is to add another loan to the current home loan. This would cover the purchase of the new home as well as the existing mortgage, until a time when that house is sold. In this scenario, you would pay interest on both home loans until the sale of the existing property.
Another option for bridging loans is to use a product where both properties are held as security. This would usually be over a period of 6 to 12 months and in this time frame, you would only pay interest on the loan, not the principal. Once the original home is sold, the funds received would pay off a portion of the loan and your payments would then revert to cover both interest and principal, or in fact, a new structure could be drafted.
What are the risks?
Like all credit, there is always some degree of risk when you buy a new house before selling your existing home, and it must be noted that often bridging loans have higher rates of interest. Because bridging loans are designed for short-term use, you may find yourself paying large sums of interest if your existing home does not sell within that period.
What do I need to consider?
As with all credit, it's essential to carefully check interest rates, fees and specific associated features. If you aren't sure about the home loan product that is best suited to your situation, engaging the services of a trustworthy mortgage broker is a great idea.
Preston Finance are experienced mortgage brokers and have been helping Cairns locals secure their dream homes for many years. Contact us today to discuss bridging loans or any other home loan products of interest.