Buying your next home

Bridging finance is available to those people who are looking to purchase or construct a new home prior to selling their current property even if the proceeds of the sale of their existing home are required for the new purchase.

But you will need to carefully explore all the options before you commit. For most people it is far more advisable to sell your existing property before you commit to a new one. Talk to your local Mortgage Choice broker to find out if bridging finance is suitable for your current situation.

There are different methods of arranging bridging finance and also different variations to each method depending on which lender you choose to use.

Method 1

The lender takes both properties as security and you have one loan (Peak Debt) to cover both the existing debt and the new purchase. You then typically have a period of 6 - 12 months (the bridging period), in which to sell your existing property. During this bridging period, different lenders have different repayment requirements.

Some lenders don’t require repayments during this period. Instead, the interest on the loan is added to the total loan amount. This is called capitalising repayments. Your Peak Debt will therefore be increasing each month as the interest is added to your loan. Your monthly interest will also be calculated on your Peak Debt including the capitalised repayments.

Once you sell the property, the proceeds of this sale are then put towards the overall Peak Debt, leaving you with an End Debt or Final mortgage.

This End Debt is then transferred to a regular mortgage product and paid as per any other regular mortgage with the new purchase being held as security.

Please note that borrowing capacity is usually assessed on the End Debt and not the Peak Debt. However, if the property is not sold during the bridging period, repayments may be required on the Peak Debt, which could cause financial strain on you as the borrower, because you may not have the income to service the loan.

It is highly recommend that at least some repayments are made during this bridging period where possible so as to minimise the interest and overall Peak Debt.

Other variations of this are:

• where the lender requires repayments on your existing mortgage whilst capitalising only the repayments on the new purchase; or alternatively,
• where the lender requires repayments on the whole mortgage during this period for both the existing and new purchase.

Clients will only be able to capitalise repayments if the total Loan to Value Ratio (LVR) does not exceed lender approval conditions. LVR is the ratio of the amount lent to the valuation of the security. For example, if a home loan is $270,000 on a home valued at $300,000, the LVR is $270,000 multiplied by 100 and divided by $300,000 = 90%.

While the sale of the existing home goes through, the minimum repayments are usually calculated on an interest only basis. Depending on your lender, you may be able to capitalise all repayments until the sale is completed. It is important to remember that this option will cause your Peak Debt to increase and therefore increase the overall interest you will pay.

Wherever possible, making some repayments is recommended so that if you do have difficulties in selling your property, you will not have an additional 6 months repayments added to your loan amount (instead, the amount to be added to your loan will be reduced by whatever you have already repaid). We have tools to help you work out how much your potential minimum repayments will be so that you can anticipate the changes ahead.

Your lender may allow you to choose to either capitalise your repayments (add them to the total amount of the loan), or continue to pay them. If you continue to make repayments, this will stop the total amount of the loan ballooning and limit the amount of additional interest being charged. If you are unsure as to whether to keep making repayments during the bridging period, talk to your local Mortgage Choice broker, who will advise you on the appropriate course of action that will suit your current financial circumstances.

You will normally have six months to sell the existing property or 12 months if a new property is being constructed. If the property has not been sold by that time, the loan will be reviewed and new arrangements may need to be put in place.

Remember that a standard settlement in some states can take up to 6 weeks so this needs to be taken into consideration when calculating the bridging period.

If you are unsure of how to calculate the bridging period and estimate the impact that it will have on your loan, ask your local Mortgage Choice broker.

Yes. If you do not have funds readily available then a deposit bond is one alternative. A deposit bond is a substitute for a cash deposit that guarantees the purchaser will pay the full purchase amount by the settlement date. Institutions providing deposit bonds act as a guarantor that payment will be made. They are generally used when cash isn’t readily available for a deposit. You can apply for a deposit bond once you have the formal approval from the lender, or if you can show that you have access to funds from another source such as shares.

When applying for a deposit bond, an independent assessment will be made by your deposit bond provider. Bonds can be issued for a period of up to 48 months, however the shorter the period the bond is required, the lower the cost to the borrower. A bond for a 10% deposit on a $500,000 property will typically cost around $600.

If you need help with the arrangement for a deposit bond, talk to one of your local Mortgage Choice brokers. They will be more than happy to assess your current financial situation and will make appropriate recommendations.

That will depend on the rental market in particular and the state of the housing market generally. It will also depend on the size of your mortgage and how much interest you are paying as compared with the type of property you might be looking to rent and the subsequent rental payments on this.

Your Mortgage Choice broker will be able to help you estimate the cost of bridging finance, which you can then compare to the potential cost of moving versus renting. Of course, you may be lucky enough to organise a simultaneous sale and purchase, which offers the lowest risk.

Stamp duty is a state government tax based on a property's selling price. Each state or territory has different rules and calculations. Stamp duty can be a significant additional cost when buying property. Use our stamp duty calculator to get an idea of what you will need to pay.