Homeowners wanting to move up the property ladder to bigger and better houses are finding themselves scrambling to locate buyers for their homes because bridging finance is now only reserved for those with a huge amount of equity.
But whichever way homeowners decide to step up the property ladder – either selling and then buying or buying and then quickly selling – it’s risky business as they could end up with either no house or two houses they can’t afford.
Squirrel Mortgages founder and head of mortgages John Bolton said the reason people buy before they sell is because they don’t want to end up having nowhere to go.
“You don’t want to sell your house and suddenly find that you can’t find something to buy and you have to go rent some shit box in some part of town that you don’t want to live in.
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“In my experience people generally buy before they sell, especially if they are fussy about what they are looking for.”
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Most buyers were taking the most risk-adverse option, he said, and making conditional offers either subject to their existing house selling, which seemed to be acceptable in the current market.
But those who needed to go unconditional on their next property and knew they were getting a good deal were buying their new house unconditionally and putting in a long settlement clause of three months to give them time to sell.
As a back-up, homeowners who had a lot of equity in their home could apply for an open bridging loan as a buffer to buy them another six months in case their home took longer to sell.
Bolton said bridging finance was still available to people if they had a combined 70% loan to value ratio across both properties, which was not uncommon for people aged in their mid to late 40s and had already owned property for five to 10 years and built up a lot of equity in that time.
“Bridging tends to work when you find the property you really want but you haven’t sold your property yet. So a property that you love or have looked at for years suddenly comes on the market and you go ‘oh I want it’, but you don’t have enough time to sell your property so bridging is a viable solution.
“The way we typically handle bridging is that you buy with a long settlement and ideally it means you sell before you settle on a new property.”
Squirrel Mortgages founder John Bolton said bridging finance was costly but could be a good backup for high-equity buyers who couldn't sell their homes in time. Photo / Supplied
He recently arranged bridging finance for a client who purchased a property for $2.3 million before selling his own home. A three-month settlement was negotiated to give him time to sell it and if he wasn’t able to then he had bridging finance to fall back on.
Bolton said anyone looking at buying before selling should get their house ready to hit the market as soon as the offer on their new house is accepted and already have a market appraisal done so they knew how much to expect. They should also be well aware of the type of house it was and how long it could take to sell.
“For example if it’s monolithic clad or it’s a plaster house you would need to be very, very cautious because those properties would be a lot harder to get sold.”
Bridging finance added to the cost of buying a new home because the homeowner had to cover the mortgage on two houses. It was an interest-only loan charged at the card rate, which at a bank is currently around 8.5%, and set up to cover the amount of debt that would be repaid when the exiting house sold. The remaining amount is set up as a normal mortgage on a longer term such as 30 years.
It was also available through some second-tier lenders but the interest was around 10% and they also charged a 1 to 2% set-up fee.
“It [bridging finance] is going to cost you more, it’s not cheap money and you certainly don’t want to be bridging for a long time but it can help you until you get your property sold. Anyone contemplating bridging has to accept they might not get the price they want for their own home and they still have to sell.”
Loan Market mortgage adviser Dave Williams said bridging finance was near impossible for most homeowners to get so they often had no choice but to make an offer conditional on them selling their own house and hope they sold it in time before being cashed out or the time frame expired.
But it doesn’t always play out the way they hoped. Several of his clients have missed out on houses in the last few weeks because they couldn’t sell their current homes in time or for the right price to allow them to upgrade.
One client had an offer on a large property closer to the beach accepted for around $1.5m conditional on the sale of his own house.
Williams said the owner was feeling comfortable as he needed to get $1.23m to make the deal work and had the property appraised at $1.3m.
But when it came time to sell, the highest offer was way below what he needed and he missed out on getting the new home.
“He was miles off, absolutely miles off, and just couldn’t sell it for that.
“He needed to sell at $1.23m so it was a real kick in the guts for him.”
Those lucky enough to find a buyer who will pay the price they need to enable them to make their next step up the ladder often arrange a contemporaneous settlement so both properties settle on the same day.
Williams said when there were unconditional contracts on both properties and the settlement dates were out by several weeks then closed bridging finance was often available and much easier to get than open bridging finance for a six-month period.
But Harcourts national auction manager Shane Cortese did not think people should try to bridge. Instead, he believed the best way to approach a house upgrade was to sell first with a long settlement, which would then give them time to buy as an unconditional cash buyer.
People in an unconditional position that could bid at auction day put themselves ahead of the conditional competition that was often lurking in the wings, he said, because while they might be the only bidder in the auction room, they were not the only buyer.
He recently saw a bidder decide not to increase a bid at auction because they were the only bidder and the auction passed in. The vendor then opened the property up to the conditional market and within 48 hours it was a five-way multiple offer.
“To be cash unconditional and give owner’s certainty – you are not going to get a massive discount on a property, but you may be rewarded in the auction rooms for being in that position because you are giving certainty.”
Sellers were taking a “massive risk” by going with a conditional deal because 75% of conditional properties fell over if they were subject to a sale of another house, he said.
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