Second Mortgage Loan & Bridging Loans
SECOND MORTGAGE LOAN & BRIDGING LOANS
In a perfect world you would sell your house and buy a new one at the same time but in reality it is hard for the timing to work out. Due to this we will normally structure a loan approval on the basis that you either buy first or that you sell first. If you manage to find a house to buy and sell at the same time we can adjust the approvals later to accommodate this.
Appreciably, there are some advantages and disadvantages whether you buy or sell first so it is important to get advice on your unique situation. Everyone’s situation is different and some borrowers financial circumstances may dictate that they only have the option of selling first.
Buying First or Selling First?
They are many situations and life events where people consider taking out second mortgage loan. This can be due to a growing family, due to a family relocation, part of a wealth building strategy or for a number of other reasons.
If you decide to sell your existing house, we explain below some of the key considerations as to whether you are better buying first or selling first. We also explain bridging loans which are designed for this situation. If you plan to keep both properties, we explain another important consideration which is the need for cross-collateralisation between your properties and how this can be avoided.
Buying First Advantages
Selling First Advantages
Second mortgage loan
Simply put, a second mortgage is a home loan taken out on a property that already has an existing mortgage. This may be taken out to help conduct repairs on the home, a full-scale renovation or if a parent wishes to act as guarantor and use their home as collateral for a family members loan. Because a second home loan has a lower priority than a first mortgage loan, a lot of lenders will be reluctant to issue a second loan as it’s seen as a high risk. To qualify for a second home loan, you’ll have to get approval from your original lender first. You can then choose to take out a second mortgage loan with them or opt for a different lender.
A home bridge loan is a temporary loan arrangement that allows you to buy a property immediately whilst you wait for your property to sell. Most lenders will allow up to 12 months to sell your property and repay the bridging loan. Bridging loans don’t need to be paid every month like a normal home loan but of course you will need to pay the interest in the end so you will pay more interest if you do not sell as quick as possible. Typically, you do not have to show regular income to pay the bridging portion but you will need to have good equity to qualify for a home bridge loan given the risk that the property may sell for less than you think and the risk that it may take longer than expected to sell the property. The diagram below illustrates an example of a mortgage bridge loan working in practice.
In this example the purchaser owns their property outright and is upgrading to a more expensive house. The total loan is structured into two loan facilities. The mortgage bridge loan portion of $300,000 does not need to be paid each month as it will be repaid on the sale of the current house. The new loan of $440,000 will need to be repaid on a monthly basis.
Even though the house is worth $350,000, in this example, the bridging portion is less than this in case the house sells for less than expected. This ensures that even if it sells for a little bit less than expected the loan can be repaid in full. The new loan of $440,000 is a normal loan product and will have to be paid each month as you would with a normal home loan.
Make an appointment with a bridging loan broker for home loans Gold Coast and Australia wide today to find out more.
A bridge mortgage is a temporary loan arrangement that allows you to buy a property immediately whilst you wait for your property to sell. Most lenders will allow up to 12 months to sell your property and repay the bridging loan. The bridge mortgage does not need to be paid every month like a normal home loan but of course you will need to pay the interest in the end so you will pay more interest if you do not sell as quick as possible. Typically, you do not have to show regular income to pay the bridging portion but you will need to have good equity to qualify for a bridging loan given the risk that the property may sell for less than you think and the risk that it may take longer than expected to sell the property. The diagram below illustrates an example of a bridging loan working in practice.
The existing loan was secured by the existing house. The new loan is more than 100% of the new house value so the bank must take a mortgage on both houses to provide the new loan. At first glance it may not appear a major concern but the impact later on can be significant. The two houses and the two loans have become linked and what this means is that if you ever sell either property, the lender may seek to pay down the debt on both the loans from the sale proceeds.
The problem becomes bigger if you develop a larger portfolio because when you buy a third or fourth property you will have to link the other properties as well. It means that you cannot change any loan without changing all the others. We have encountered investors with 8 or 9 properties all cross-collateralised and to get a simple increase in one of the loans you need to re-value the entire portfolio.
If there is a situation in the future where you find yourself in financial difficulty and you need to sell one of your properties to access some further cash then you are at the mercy of the bank. The bank has the right to take all the proceeds of the sale to repay the other loans. The below diagram demonstrates the other alternative to cross collateralisation using the same situation.
You will notice that this creates a third loan but it means that there is a specific amount of debt on each property. We have split up the loan amounts intentionally so that there is a maximum debt of 80% on each property to eliminate mortgage insurance. For tax purposes new loan 1 and new loan 2 can still be treated as being related to the new house so the tax treatment will not change in either example. That is, the tax treatment of the debt will relate to the clear purpose behind borrowing the money and not upon the property which is used as security.