There may be a way you can buy before you sell with the confidence of knowing finance is in place to cover the worst case scenario.
It is called bridging and basically enables you to you borrow/ carry the full purchase price + the stamp duties for the next purchase in addition to your current mortgage for a max of 6 months while you market and sell your current home. You may not end up needing to bridge, you could negotiate a 120 days purchase on the new place and sell yours in the meantime, settling both the sale and the purchase on the same day, but at least you are covered if that doesn’t transpire.
A bridging loan is a short term loan which allows you to purchase a house before you have sold your current residence. You can also use it to build a new house while you continue to reside in your home. The loan is secured by your existing property and the new one. Generally you have twelve months to repay the loan.
Although it is a quick solution to allow you to move ahead and purchase the property you have found, bridging loans often come with higher interest rates.
Let’s look at a quick scenario where bridging would apply.
Mr and Mrs Jones live in their current home which has an estimated value of $700k and an outstanding mortgage of $200k. (As part of our loan application, we would send a valuer through the property to make sure).
They wish to sign a contract on the next property for $900k before they have a signed contract of sale on their current home.
The stamp duty and assoc costs would be $55k approx so they would need a total of $955k at settlement. Their current mortgage is $200k so the amount they would be carrying in total mortgage, referred to as the peak debt by the lender, is $1,155m.
The lender then look to make sure they are not left over-exposed by adding the 2 property values together, $700k + $900k = $1.6m.
The peak debt is $1.155 vs values of $1.6m so the Jones are borrowing 72% of the combined property values. This should be fine because the percentage is less than the lender threshold of 80%.
The next measure is affordability and options are available if you are not comfortably able to afford the repayments on $1.155m while you wait to sell. In some cases, the lender will let you set aside (borrow) an amount of your equity to use to pay the loan while it is at its peak. Again, the total loan can’t be more than 80% of the values so in the above scenario, there is 8% equity that could be available ($128K).
A rough calculation of 6 months’ interest on $1.155m is $30k, so the available $128k is more than enough to cover.
One thing that is often forgotten though is the deposit on the next purchase, usually 10% of the purchase price is require when you sign the contract to buy. Using our sums, $128k in equity could be available, $30k is set aside for repayments leaving $98k, of which $90k is used for the deposit.
You may glean from these very tidy numbers we have done this many times before! These figures are just a guide and Mortgage Broker Melbourne should be engaged to work these out for you on a case by case basis.
Marc has been a professional lender for 28 years. After beginning his career in 1990 with a UK Building Society, he moved to Australia where he held several different retail banking roles. In 1999 it became clear to him that a mortgage broker would eventually become an obvious choice for someone looking for a home loan so he took the plunge and became an independent broker. He hasn’t looked back since!