Proper bridging finance is the secret to success, writes Effie Zahos

Is it possible to buy a property before you sell? Absolutely! I’ve done it – but not without a few butterflies. You’ve got to be confident that your property will sell and that it will sell in record time. If you can’t engineer a simultaneous contract settlement, then you need to be certain that your lender has a true bridging finance product and doesn’t just simply slap two mortgages together. If they do, it could cost you the approval.

First things first. There’s no point buying before selling if you think you will have trouble offloading your home. Most experts measure the health of the market by auction clearance rates. But Angus Raine, executive chairman of Raine & Horne, says a truer indication is “days on market” – the time between a property hitting the market (the listing) and an offer being accepted.

In Sydney Raine & Horne’s figures show the days-on-market indicator is running at 30 days a property on average. If you were to look at days on market across all sales from CoreLogic RP Data, Sydney sales have been sitting on an average of 49 days over the past 12 months. Brisbane’s are on 68 days, Melbourne and Perth’s are both on 64, Canberra is on 70 and Darwin is on 95.

“If the days on market are short, as is the case with Sydney and Melbourne real estate, then it’s appropriate to label it a seller’s market,” says Raine. “In contrast, in the dark days of the GFC, days on market for housing in NSW’s Southern Highlands and Canberra were closer to 350 days.”

Whether it’s a buyer’s or seller’s market in your area, Patrick Bright, a buyers agent from EPS Property Search, says if your home is priced right – around the average price for what it offers – then it shouldn’t take any longer than one to two weeks.

Having said that, he says it can depend on its appeal. “Most homes that sit around more than two weeks in a seller’s market are poorly marketed, have a less than good sales agent or are overpriced – or there’s a combination of those points.”

The typical settlement period is about 42 days. If you’re about to buy another  property by drawing out the equity in your home loan, as I did, you could give yourself some more time to sell your home by delaying settlement on the purchase. The other party will, of course, have to agree to this. Bright says six to 16 weeks is common; the longest period he has negotiated is nine months.

Most owners buy before they sell with the help of bridging finance. The trap here is that if your lender simply offers you two mortgages, you may not be able to prove that you can afford them both.

“It’s what brings people unstuck,” says Michael Daniels, NSW-ACT manager for Smartline Personal Mortgage Advisers. “A few lenders do bridging finance really well but many don’t. That’s why a true bridging loan product is really the way to go.”

He gives this example. Say you’re living in a house worth $700,000 with a mortgage of $400,000 (equity of $300,000). You want to upsize to a house worth $1 million. Those with a true bridging loan will assess your repayment capacity on your “end debt” once the first property is sold. Here, that would be $700,000 ($400,000 from the original property and the additional $300,000 for the new property), not $1.4 million, which could be hard to service.

With true bridging finance, there is normally a maximum time period of about 12 months – the original property needs to have been sold and settled in that time. A full valuation – not just a desktop valuation – will be carried out by the lender to ensure that the original property is saleable. 

Daniels says lenders without a true bridging product will assess your repayment capacity on the “peak debt”, which would be $1.4 million ($400,000 from the original property and $1 million for the new one). Effectively, you’d have to be assessed as being able to afford double the debt – which is massive. This is not really a bridging product, just two mortgages. However, there would be no time limit on selling the property.

As for repayments, that depends on your lender and your equity. Some allow interest to be capitalised, meaning you can free the repayments on your bridging loan, leaving you only the home loan repayments to worry about, while others insist you cover your interest repayments at least. If your lender doesn’t offer you a true bridging loan, it could be worth refinancing.

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