Bridging finance vs deposit bonds - avoid financial distress by learning the difference

Have you decided to purchase a new home before your existing home is sold and settled? Bridging finance might be an option for you - but beware - some pretty big risks are involved.

Bridging finance vs deposit bonds

Overview of bridging finance

Bridging finance allows you to purchase a new home while your old home is not yet sold. As the name suggests, this sort of loan will 'bridge the gap' between two properties by financing both for a short period of time.

The loan is secured by the old and new properties, and the rates are similar to normal variable home loans. In the past, bridging finance was more like a personal loan with high interest rates.

This sort of loan is often available with your current lender, which is a much easier option than switching the loan to a new lender for a short period of time.

Dangers to be aware of...

Your property might not sell as quickly as you thought, and once your new property settles, you will be left trying to cover the cost of a double loan. This is not ideal, especially if you're upgrading to a more expensive property. There are plenty of borrowers who have lost the lot or had to borrow from friends and family due to being unable to meet their repayments while they wait for the old home to sell.

Your property might not sell for the price that you imagined, which could leave you further in debt, with less equity in your new property. You probably spoke with a few selling agents about the price that you can expect to see for your home, but the real estate market isn't always predictable. Sometimes, selling agents will give a generous assessment to get the listing, and then bring you back down to earth later when you start receiving offers.

You might feel pressured to accept a lower offer than what you could have realistically achieved because you need to sell your home as soon as possible.

Recommendation: sell before buying

The simple alternative would be to sell your home before you buy another, which will save you from spending more than what you can afford because you already know how much your selling price will be. In this instance, bridging finance could be a sound option because you know that your property has already sold.

Deposit bonds - the alternative...

Deposit bonds are a guarantee that you will pay the deposit at the settlement of the property. The issuer of the bond guarantees that it will pay the vendor the deposit at settlement if you default on the purchase.

They can do this because they will pursue you for the deposit, so if you don't go through with the sale, you will still lose your deposit.

Deposit bonds usually cost about 1% of the deposit amount and can be purchased through most lenders or real estate agents.

These are a great alternative if you want to attend auctions but you don't have the money in the bank because your property hasn't settled yet. They are also useful for people who are awaiting settlement on their existing property, but the deposit has not been released by the purchaser.

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