Buying a new home before selling your current one can be stressful. You may find the right property, but your existing home has not sold yet. This is where bridging finance NZ can provide a short-term solution.
Bridging finance is designed to help cover the gap between buying one property and selling another. It can give you the funds needed to settle on your new home while you wait for the sale of your existing property.
However, it is not the right option for everyone. You need to understand how it works, what it costs, how much you may be able to borrow, and how you will repay the loan.
What Is Bridging Finance NZ?
Bridging finance NZ is short-term lending that can help you buy a new property before the sale of your existing property has settled.
For example, imagine you own a home worth $800,000 and still owe $400,000 on your mortgage. You find another home you want to buy for $900,000, but your current property has not sold yet.
Instead of waiting for the sale, a lender may provide short-term finance to help you complete the purchase. Once your existing property sells, the proceeds can be used to repay the bridging loan and reduce or clear your existing debt.
The exact structure depends on your financial position, property values, existing debt, expected sale price and the lender's criteria.
The Reserve Bank of New Zealand recognises bridging finance as a specific type of lending. It is also listed as an exemption from the Reserve Bank's LVR restrictions, although lenders still apply their own lending and affordability criteria.
How Does Bridging Finance Work?
The process is usually based around three key steps.
You find and agree to buy your new home
You may find a property that suits you and agree on a purchase price. If your current home has not sold yet, you may need additional finance to complete the purchase. This is where speaking with a mortgage broker NZ can be useful. Your adviser can look at your existing mortgage, property equity, income and the proposed purchase.Short-term finance covers the gap
The lender assesses whether the combined lending is affordable and whether there is enough equity and a realistic exit strategy. Depending on the structure, you may temporarily have finance connected to both properties. The amount available can depend on factors such as:- The value of your existing property
- The value of the new property
- Your current mortgage balance
- Your income and other debts
- Expected sale proceeds
- Your ability to service the lending
- The lender's own criteria
Your existing property sells
When your current home is sold and settlement takes place, the sale proceeds can be used to repay the bridging finance and restructure the remaining mortgage. The aim is to use bridging finance as a temporary solution, rather than as long-term borrowing.
When Might You Need Bridging Finance?
There are several situations where bridging finance may be worth considering.
You have found your next home before selling
This is the most common situation. You do not want to lose a property you really want, but your existing home has not sold yet.
Your settlement dates do not line up
Sometimes both properties are sold and purchased, but the settlement dates are different. A short-term funding gap can make the timing easier to manage.
You want more certainty when buying
Having a finance strategy in place can help you understand what is possible before making an offer. However, you should still make sure you understand the conditions attached to your finance.
How Much Can You Borrow?
A common question customers ask when considering a new property purchase is how much can I borrow.
With bridging finance, the answer is not simply based on your income or deposit. The lender normally needs to consider the overall position, including your existing debt, both properties, expected sale proceeds and your ability to manage repayments.
For example, if you have substantial equity in your current home, that may help support the lending. But equity alone does not guarantee approval.
Banks also have affordability requirements and other lending rules. The Reserve Bank notes that banks assess borrowers using their own lending criteria in addition to macroprudential rules such as LVR and DTI requirements.
This is why getting advice before making an offer can be valuable.
Do You Need Mortgage Pre Approval?
Getting mortgage pre-approval can help you understand your borrowing position before you start seriously looking at properties.
With a bridging situation, however, your finance may need to be assessed differently from a straightforward home purchase. Your adviser may need information about:
- Your current mortgage
- Your current property's estimated value
- The expected sale price
- The new property's purchase price
- Your income
- Existing debts and commitments
- Your deposit or available equity
- Your expected sale and settlement dates
A clear picture of these details can help lenders assess the proposed structure.
What Are the Risks of Bridging Finance?
While bridging finance NZ can solve a timing problem, it comes with risks.
Your existing home may take longer to sell
The biggest risk is that your property does not sell as quickly as expected. The longer the bridging arrangement remains in place, the longer you may have additional borrowing costs.
Your property may sell for less than expected
If you expect to sell for $800,000 but receive a lower offer, you could have less money available to repay the lending. This is why it is important to use a realistic expected sale price rather than relying on an optimistic figure.
Interest and fees can add up
Short-term finance may have different interest rates and fees from a standard home loan. You should understand the full cost before agreeing to the arrangement. Ask about interest, establishment fees, valuation costs, legal costs and any other charges that may apply.
Your repayment position still matters
Even if you have strong equity, the lender will want to understand how the lending can be serviced. Your mortgage broker services can help you compare different structures and understand how the proposed repayments may affect your budget.
How Can a Mortgage Broker Help?
A New Zealand mortgage broker can help you look at the complete picture rather than focusing on one lender.
For a bridging situation, this can include comparing available lending options, discussing your expected sale proceeds, working through the timing of settlements and helping prepare your application.
An independent broker can also help you understand whether bridging finance is actually the best option for your circumstances.
Capital Finance works with major banks as well as a range of non-bank lenders. The business says its advisers work with different borrower situations and can help with the lending process from calculating borrowing capacity through to managing applications and negotiating terms.
Bridging Finance vs Waiting to Buy
Not everyone needs bridging finance.
If your existing home is likely to sell quickly, waiting for settlement may be the simpler option. You may also prefer to sell first so you know exactly how much money you have available for your next purchase.
On the other hand, waiting may mean missing out on a property you really want.
The right decision depends on your finances, property market conditions, sale prospects and risk tolerance. A broker can help you compare the options before you commit.
What Should You Do Before Applying?
Before applying for bridging finance, consider these steps:
- Work out your existing mortgage balance
- Get a realistic idea of your current property's value
- Estimate the likely sale price rather than relying on the highest possible figure
- Understand your expected purchase price
- Review your income and existing debts
- Allow for interest, legal, valuation and other costs
- Have a clear plan for repaying the bridging loan
- Get professional advice before signing an unconditional agreement
A clear exit plan is particularly important. The lender needs to understand how the short-term borrowing will be repaid.
Talk to Capital Finance About Your Options
If you are buying a new home before selling your existing property, Capital Finance can help you understand your financing options.
Capital Finance is an independent mortgage adviser based in Papakura, Auckland, working with clients across New Zealand. The company works with major banks and a range of other lenders and says its advice is free, with no obligation.
Rather than assuming bridging finance NZ is automatically the right answer, the team can look at your property values, existing lending, income and plans to help you understand what may be achievable.
Talk to Capital Finance about your home loan options
FAQ
What is bridging finance in New Zealand?
Bridging finance is short-term lending that can help you purchase a new property before your existing property has sold and settled. The sale of the existing property is commonly part of the plan to repay short-term lending.
Is bridging finance a good idea?
It can be useful when the timing of buying and selling does not line up, but it is not suitable for everyone. You should consider the interest, fees, repayment ability and risk of your existing property taking longer to sell.
Can I get bridging finance before selling my house?
Potentially, yes. Lenders will assess your overall financial position, including your existing mortgage, property values, income, debts and proposed exit strategy.
Do I need mortgage pre approval for bridging finance?
You will generally need the lender to assess and approve the proposed finance structure before you rely on it to complete a property purchase. The exact requirements vary between lenders.
How long does bridging finance last?
The term depends on the lender and the circumstances. Because it is designed as short-term finance, you should have a realistic plan for selling the existing property and repaying the bridging lending.
Can a mortgage broker help with bridging finance?
Yes. Mortgage broker services can include helping you understand your options, compare lenders and prepare a finance structure based on your circumstances.
Does bridging finance have higher interest rates?
The cost depends on the lender and structure. Bridging finance can have different rates and fees from a standard home loan, so it is important to compare the total cost rather than looking only at the advertised interest rate.
