COMMENT: A common complaint from buyers, particularly first home buyers, at the moment is that even if they can afford a house, there simply isn’t the stock on the market to buy.
Listings have generally been low over the last 12 months, with the pool of properties available to buy in the country's major metros significantly down on the last market peak.
The problem with low stock on the market is that it’s a vicious circle. A current homeowner looking to upgrade from their first home to a larger or more upmarket home doesn’t want to list their property without having secured their next property.
Because of low stock, they can’t find a property they like so they never list their current home. Simply put, the risk of them ending up off the property ladder and renting - either short-term or long-term - is too high. So homeowners keep their current home and the low stock problem continues.
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New builds are going some way to alleviate this but larger developments tend to be further out from the city and not always appealing to “upgraders”.
Enter the open-bridge loan. This is a temporary loan that allows current homeowners to purchase a new owner-occupied property prior to them selling their current home.
Key points are that they rely heavily on the equity in a buyer's current home and less on the affordability of the mortgage. This is one of the very few cases where a main bank or second-tier lender will provide a mortgage that they deem to be unaffordable (by their calculations) because they know that the buyer intends to sell in the near future.
Applicants for this type of loan should estimate the lowest sale price they would accept for their current home. For example, if your house is worth $1 million, calculate the result if you sell it for just $850,000. Things will get complicated when a bank has approved you for a loan based on a forecast sale of your home and you can’t get the price you promised them.
By the very nature of an open-bridge loan, there will be a time when you are paying interest on two mortgages with an open-bridge. Depending on the size of your mortgage and the time it takes to sell your current home, it’s not unreasonable to think you could spend an additional $20,000 to $30,000 in interest over and above what you would have had to pay on your normal mortgage. This is usually what stops people from investigating these loans further.
However, homeowners put off by the extra interest should ask themselves if they would pay an extra $30,000 to secure their next house. For example, if you were upgrading to a $1.7m home, would you have paid $1.73m if it meant getting you into this house? If the answer is yes, then don’t let the additional interest cost put you off. If the answer is no, then open-bridge loans aren’t the strategy for you.
To that point, open-bridge loans aren’t for everyone. Those who taking on the loan are buying with the hope that they will be able to sell their current home so some risk tolerance is required. Upgraders will also need to have their current mortgage sitting at less than 60% LVR (or have other equity/cash reserves) as banks will typically only lend up to 80% of the combined value of the current and new home.
A lot of people who are pre-approved for an open-bridge loan never actually use it because they do successfully sell their property in time but the act of getting pre-approved has opened up the option for them.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
