Understanding Bridging Finance

If you have found your dream home before selling your old one there is a way to fund both – consider bridging finance or deposit bonds.

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Bridging finance

Offered by most lenders, a bridging loan provides you with the funds to purchase your new home in the event you have not sold your existing home. The loan can be secured by the equity in your existing home, the new property or both.

In the event you obtain a single loan based on the equity in both properties, you will generally have six to 12 months to sell your old home. Make sure you discuss the repercussions of not selling within the specified loan period with your lender. Throughout the term of the bridging period you will normally only pay the interest owing. After the sale of your property, payments will again address the principal and interest owing on the remaining debt. Or you may choose to take out a new home loan.

An alternative is a new loan on the purchased property. This new loan will not require payments during the bridging period but the interest will accrue and you will still be paying off your existing home loan. Once your old property has sold and the respective home loan paid off you will need to renegotiate the new property’s home loan terms with your lender.

Taking out bridging finance can add considerably to your debt load, so make sure you seek financial advice before committing to a bridging loan.

Deposit bonds

A deposit bond is an alternative to a cash transaction and can provide you with the finance to cover the deposit on a new home if your money is tied up in an existing property. Deposit bonds operate as a guarantee by your lender that you will pay the deposit on the purchase of your new home at the time of settlement rather than at the exchange of contract.

Deposit bonds are considered a convenient financing option as they can be arranged quickly, generally offer a six-month term and a one-off fee, and offer up to 10% of the purchase price of the property.

Deposit bonds are generally only accepted by large developers selling ‘off-the-plan’ properties. The seller of a suburban home you wish to purchase is unlikely to accept this option.

Always speak to your bank or financial adviser before making decisions about either of the above options.

 

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