Bridging finance, buying and selling at the same time, financial advice, mortgage broker
Loans can be incredibly complex and confusing. Mark Livens from Aussie Home Loans Elsternwick helps demystify this common upgrader question.
One of the most common things that I get asked by people buying a new home is, “How do I go about obtaining finance for my new property if I haven’t sold my current home?” Every day, scores of potential homebuyers are faced with this situation.
Let’s use the example of a one-bedroom apartment in St Kilda. It was perfect for you and your partner when you bought it a few years ago, but now, add a dog and two kids and it has become a hellhole. It has got to go. So what do you do?
Examine your budget
The first thing you need to do is find out what your current property is worth. Your mortgage broker should be able to assist with valuation reports for you, but at some stage you are going to need to speak to a real estate agent. Find an agent you like and trust and get some idea of estimated sale price and agent’s commission. You will need some details from the agent regarding recent sales in the area of properties similar to yours. How much did they sell for? How long were they on the market?
You need to get a good indication of what price you can expect for this sale, and from that how much money is left over after paying out your current loan and paying the agent’s fees.
Now consider what you want to buy. Let’s say you have found the perfect sea-change property down in Mornington. You may have spoken to the agent selling this property and you would have a fairly good idea of what you need to offer to buy this seaside townhouse.
So now we know how much you hope to sell for and how much you hope to buy for. If you haven’t done it yet, this is when you would speak to a mortgage broker and do some calculations.
Work out your options
Should you sell or buy first? Here’s a run down of the implications of both.
Option one: Sell first and hope for the best
Sometimes called “the stress creator”, this option is remarkably common, but if it doesn’t work — for instance if you can’t secure a property you want by the end of settlement — you’re going to need a plan B.
With this option, you put your St Kilda property on the market, sell and request a long settlement (for instance, 120 days or earlier by mutual agreement). Once this sale goes unconditional, you can make an offer and arrange for settlement of your new purchase. This can be organised to occur on the same day as the sale of your current property. As long as settlements of both properties are simultaneous (the same day), or the sale of the St Kilda property happens prior to the new purchase, then this should work.
The reverse for this is also true. Some people purchase first with a long settlement, and then arrange for their property to sell with settlement occurring prior to or simultaneous with their new purchase. Be warned however, doing this is the true stress creator and is not advisable in most circumstances since it puts pressure on you to sell quickly.
Option two: Use bridging finance
This is the safer option. Put simply, bridging finance provides funds for you to buy your new property in Mornington before you have sold your St Kilda property. It can cover all the costs including stamp duty, legals and so on. Once the St Kilda property is sold, you can use the funds from the sale to pay down your loan. This bridging loan can be interest only and repayments may be capitalised (that is, a buffer is added to the loan amount to allow for higher repayments) until you sell and pay down the debt. If possible, ensure the finance is pre-approved before you commit.
It sounds easy and it can be, as long as a few basic rules are followed.
It is possible for bridging finance to occur over an 80 per cent lending ratio, but it is desirable for the total loan-to-value ratio (LVR) to be below 80 per cent, since lenders prefer it and will in most cases require it.
In other words, let’s say the St Kilda property is valued at $450,000, with a $100,000 debt, and the Mornington property will cost $650,000. So, for a period of time you have two security properties valued at $1.1 million in total, with a home loan of $100,000 on St Kilda and approximately $690,000 (purchase plus costs) required to let you buy at Mornington.
This leaves you with total debt of $790,000, which is about a 71 per cent LVR. The loan for this $790,000 can be arranged under a bridging format and then once the St Kilda property is sold, you put the $350,000 in sale proceeds onto the current loan, reducing it to $440,000. This loan will then be secured by the Mornington property alone, with a lending ratio now down to 68 per cent.
It does differ between lenders, but generally you have between six months to 12 months to sell your current property and pay down the bridging debt, so you will still need to sell the St Kilda property in that time. It will need to be on the market with a registered real estate agent for the bridging loan to be approved.
While that’s all great, you need to make sure the lender will approve this loan. Can you afford to make the payments on the $790,000 debt, even if only for a short term?
Most lenders will calculate your ability to service debt on peak debt, the maximum loan amount (in this case, $790,000) but there are some lenders who will calculate your servicing ability on end debt, which is the amount you owe after you pay down your debt with proceeds from the sale of the St Kilda property.
All of this can be confusing and stressful, and a mortgage broker that understands your requirements and can fit you with the right lender can be invaluable at a time like this.
This article is provided for general information purposes and is not intended to constitute advice. We recommend readers obtain expert advice before making any financial decision.