How to buy another property before selling yours

In a perfect world you would settle the loan on your current home and go out and find your next property the day after. But as many would-be home buyers have discovered, things rarely run so smoothly. 

A bridging loan is the perfect short-term solution to this problem. It allows you to purchase a new property before the sale of your existing home is complete.

So, how does a bridging loan work?

Your lender will take both properties as security and you will have one loan that covers your existing debt as well as the new loan. This is known as your peak debt. You will then have a designated period in which to sell your existing property, usually between six and 12 months. 

Depending on your lender, there are a few options when it comes to repayments. Some lenders do not require repayments to be made during this middle phase. The interest accumulated on your loan is added to the total amount, meaning your loan increases each month. This is commonly referred to as a capitalising loan. 

While you don’t necessarily have to, it is strongly recommended that during the term of your bridging loan, you at least make several partial payments or interest-only payments to help alleviate any possible financial strain. 

Once you sell your existing property the sale price is then put towards your peak debt. The remaining debt will then be rolled over into a regular mortgage.

This is only one example of how repayments are made with a bridging loan, but the specifics may well vary depending on the lender. 

Before you decide to use a bridging loan, it is important to consider your own financial situation and whether this is the best option available.

Some key considerations include:

• For how long would the funds be required?

• Is there an unconditional contract on your existing property or are you yet to sell?

• Will you be able to make the repayments on the final mortgage if a capitalising loan is used?

• Are there other options available, such as renting once your existing property has settled?

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This article via Which Investment Property does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.