A traditional property move means trying to settle on two properties at the same time. Often there is a chain of buyers/sellers all wanting to complete their respective transaction on the same day. No one is really in control. I regularly hear horror stories where one party has a delay that causes issues down the line. Bridging loans ease stress when multiple transactions are in play.
A Bridging Loan uses both the existing property and often the property to be purchased to define the equity requirements of the loan structure. In essence, the borrower will have a loan that funds the purchase of a new property that is then covered partially or completely by the sale. The loan period would be three to six months, allowing the sale of the existing property and then a possible refinance if there is still debt to be covered.
This helps the buyer to purchase the new property, move in and then get the old property ready for sale. It splits the process of the property change-over into three parts: the purchase, the move and the sale. Now, the buyer is in more control of the process and can define the timeframes to suit them. This could help get a higher price for the sale, simply because they can negotiate for longer!
A Real Example – how Bridging Loans Ease Stress!
During the last COVID lock-down in 2021, my wife and I started to think about the future. We were both in our late 50s and still working. However were not happy with our residential location on the Lower North Shore of Sydney. The apartment building was in excellent condition and we had owned it for about 17 years. The area was earmarked for significant over-development – which meant construction noise, more traffic, more dust and the removal of views in all directions. Importantly, the new buildings would remove all natural light and heat resulting in higher energy costs if we stayed put.
We had recently sold an old renovated house and had some equity locked away. Our primary residence, although in a well-maintained block, showed the signs of 17 years of being lived in and needed some “tlc” to bring it back to a sellable standard. We wanted to use the equity from the house sale to fund some of the renovations and also as part of buying in a suburban area. That meant that timing was an issue – we needed to be out of the first property whilst those renovations occurred. We also needed to use both equities to fund the new property.
The Bridging Loan Solution
The solution was to use a Bridging Loan. The structure was straight forward: a refinance of the existing mortgage and used some of the equity to cover the purchase of the new property. The plan was to end the move debt-free. The loan was for six months and the interest was deducted up front, so no mortgage payments were required. Now we were now able to move on our terms.
We bought the new property on the Northern Beaches. We then had our apartment on the Lower North Shore repainted, smartened up and restyled ready for the market. It sold for more than the bridging loan within a few weeks and we paid out the new loan in full, receiving a credit for the unused interest prepayment! It also left us with enough funds to plan some future property enhancements to suit our lifestyle.
The benefits of using this type of loan included a stress-free move (no time issues), no pressure to get the old apartment spruced up for sale and reduced stress in selling the property because we knew the sale price would cover the bridging loan. Financially we are much better off because we no longer have a mortgage – or any long-term debts – with funds to buy smaller properties that will provide an ongoing income.
The Benefits of a Bridging Loan
It simplified the move and we now live a much more relaxed and quieter lifestyle away from the hustle and bustle of inner city living. It has reduced stress and our health is better for it! Even though we still work, we are doing so in a better environment. Finally, the move means that we can enjoy the community and all its amenities for many years and not have to make the move in later life when it would be even more stressful.
If you are looking for a property to purchase on the north side of Sydney, talk to us about our buyer’s agent services.