How to buy a new property when you haven’t sold your current home

When selling one property and purchasing another, the funds from the sale may not be available in time to use for the purchase deposit.  There are typically two options in this scenario: a bridging loan and a deposit bond.

Bridging Finance

Bridging Finance allows you to buy something right now and settle the sale of your property at a later date. A bridging loan is a short term home loan designed to allow you to initiate the purchase of a property before you have sold your previous one. Loan terms are often between six and 12 months and bridging loans generally have a higher interest rate than traditional home loans.

This can be a great option but carries some risk. It’s important to know that you will be able to make the repayments even in a worst case scenario where your old house doesn’t sell as quickly as you’d hoped or where property values may change unexpectedly.

It’s important to talk to a broker and ensure that you have the capacity to service the loan for the period of time required.

Deposit Bond

A Deposit Bond is a tool that, upon agreement with a vendor, can replace the requirement of a cash deposit when purchasing a property. This can be a relatively cheap method of initiating the purchase of a property usually without the need to liquidate your other assets.  The cost of a bond can vary depending on transaction complexity and the term being sought.  In a simple transaction, it is likely to be approximately 1.3% of the amount of the deposit.

A Deposit Bond is issued by an insurer to the vendor of the property for either the full or partial deposit required.  At settlement, the purchaser must pay the full purchase price including the amount of deposit.  At this point, the deposit bond becomes void.

If the purchaser fails to complete the purchase of the property, the vendor can give the deposit bond to the insurer who will provide them with the entire value of the deposit bond. The insurer will then seek reimbursement of the deposit bond from the purchaser.

Deposit Bonds are generally a fair bit cheaper than a short term loan, but it’s important to talk to a mortgage broker to compare the two, taking into account your requirements and objectives and your financial situation.

If you’d like some help deciding whether Bridging Finance or a Deposit Bond is the right option for you, and then setting-up whichever option you choose to go with, please give me a cal or send me an email, I’d love to help you.

Carl

Carl Violeta is Violeta Finance’s Mortgage and Finance Broker, a proud member of the Mortgage & Finance Association of Australia (MFAA), Finance Expert contributor for Kids Magazine and Peninsula Kids Magazine and the presenter of the Finance Segment of RPPFM’s Dream Home Movement live show and podcast.

Contact Carl on 0424 849 034 or email carl@violetafinance.com.au

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