Buying New Property Before Selling an Existing One
There are many cases whereby a vendor puts their home on the market with the intention of purchasing another property, or, where a buyer must wait for the finalisation of an existing property’s sale prior to buying a new property.
Things can become complicated if there’s a mortgage on either of the existing properties, particularly if the sale of the existing property doesn’t occur until after settlement of the new property. To facilitate the completion of purchase for the new property, and to simplify matters, ‘bridging finance’ can be arranged.
Bridging finance simply allows you to obtain finance in order to bridge the gap between receiving proceeds from the sale of your existing home and having to pay for the new property.
What generally occurs is that your lender will take security over both properties until the sale of the existing property has been finalised. The bridging amount (also known as Peak Debt) will generally be no higher than 80% of the value of both properties. In order to ease the financial burden on borrowers, some lenders will allow you to capitalise interest payments for either a specific period of time or until you’ve reached the 80% limit. (capitalising interest payments means adding them onto the loan).
A bridging loan can be slightly more expensive, and is usually separate from the lender’s normal products; however, the borrowers determine which product their loan defaults to once the bridging period is over. Once your existing property has settled, you simply use the proceeds from the sale and pay the balance of the bridging loan; then revert to your nominated loan product.
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