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.
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.
Bridging loan terms are often between six and 12 months and bridging loans generally have a higher interest rate than traditional home loans.
Bridging loans can be a great option but they do carry some risk. It’s important for the borrower to know that you will be able to make the repayments even in a worst case scenario, even where your old house doesn’t sell as quickly as you’d expected or where property values may unexpectedly change during the loan period.
We advise to talk to a broker to find out more about bridging loans and ensure that you have the capacity to service the loan for the period of time required.
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. For example, for a deposit guarantee to the value of 10% of a property price for an individual purchasing an established property in NSW and repaying that guarantee within 6 months on a $50k deposit for a property purchase of $500k, the fee will be about $650.*
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 is able to give the deposit bond to the insurer who will provide them 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.
A mortgage broker can help guide you on which option is right for you.
*this is an estimate
Need some Advice about loans?
A mortgage broker can help you find the right loan and secure the finance that’s most suitable for you. It will also ensure you avoid making mistakes.
Any questions you may have regarding loans, contact Annette Tothill on 0420 973 551.