If you’re buying a property but you already own another property and will end up owning both simultaneously for a short period of time, then you’ll probably need bridging finance. Brendon explains the intricacies of this daunting financial situation and explains why you should consider gaining pre-approval before going to market.
Right now there are two versions of bridging finance available to you:
The first is called Open-Bridging Finance and has no fixed date for when you will sell the property you currently own. The second is Closed-Bridging Finance and occurs when you already have both a fixed date for the sale of your current property as well as the purchase date for your new property.
With Open Bridging you organise finance to buy a second property without having confirmed the sale of the first property. The bridging is open because there is no specified date where the agreement will end. From a bank's perspective, this is pretty much like having a loan for two properties, as there is no definite end date. To get this type of bridging finance approved at a bank you need to show you can service the loans on two houses indefinitely.
For Closed-Bridging Finance you will have a signed sale and purchase agreement for not only the house you are planning to buy, but also the house that you are going to sell. It is simply then a matter of bridging the fixed time between the purchase of the new house and the sale of your existing house. In this case, due to there being a definite end date, banks will look a little more leniently on your income and ability to service your temporarily enlarged debt.
The cheapest way to do bridging finance is through a bank. Both of the above scenarios can be done at standard bank interest rates. However, at Velocity Financial, we also work with non-banks to organise bridging finance when banks aren't willing to come to the party. And keep in mind that there are many situations when they won’t.
In the current housing market in New Zealand, it can be a whole lot more advantageous to have bridging finance in place so offers on new property don’t have to be subject to the condition of selling your existing house. I haven’t heard of any situations in months where offers that are subject to the sale of property were successful in securing property.
Every situation is different and the advisers at Velocity are happy to talk through your situation to enable you to keep moving forward.
Brendon Ojala is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.