How to buy a new home before selling

Some people need, or prefer, to sell their existing home to purchase a new one so it helps to understand the finance options. The sale of a property doesn’t always align with the purchase of a new property so many people often use a bridging loan during the transition.

A bridging home loan bridges the financial gap between paying for a new property and receiving the proceeds from the sale of an existing one. Bridging loans can also provide finance to build a new home while the owner lives in their current home.

The lender will generally take security over both properties until the sale and purchase of both is complete. The bridging amount or ‘peak debt’ could be up to 80% (depending on the lender) of the value of both properties and, as with any mortgage, it pays to have a mortgage adviser to shop around for you. Rates are often slightly higher than standard home loans; however bridging loans are shorter term, generally for no longer than 12 months.

Some lenders allow the borrower to capitalise the interest so loan repayments aren’t required during the bridging period. This will result in a slightly higher home loan for the new property but can reduce financial stress during the transition period. When the existing property is sold, the proceeds from the sale are taken off the balance on the bridging loan, and the remainder will form the new home loan.

There are a number of factors to consider when determining if a bridging loan is suitable. One important consideration is how long the funds are expected to be needed for. This requires factoring in how motivated you are to sell the property and whether you’re looking to buy an existing property or build a new one. Obviously the longer the bridging loan is required for, the more interest you will be paying.

There are risks involved as well. Sometimes it might take longer than anticipated to build your new home, or to sell your existing property. It’s important that you are clear on market demand and how much your property will realistically sell for. A good mortgage advisor will work with you to ensure that the bridging loan works for you in the short term and the new home loan suits your medium to long term needs.