Servicing before selling

Are there any creative ways to overcome serviceability issues when you have funds to reduce the overall debt but they are tied into your property?

Scenario:
You have a home valued at 500k with 100k remaining.
You find your dream home selling in 3 weeks for 900k.
So from my understanding regardless if you got bridging finance, released the required equity or even guarantor loan you would still be required to service the 1 million debt.

If the house was sold then the buyer would have close to 400k, hence only a 500k loan.
 
With bridging finance, you generally have to show that you can service the end debt, not the peak debt. In your example the end debt would be $500k, the peak debt would be $1M.

You do need enough equity across the combined properties to show an 80% LVR, often it needs to be less. Again in this example this isn't a problem.

Lenders will capitalise the interest until you sell the first house, so you don't actually have to service the full $1M.

The down side is that you often don't get discounted rates for bridging finance so if you don't sell the first house quickly it can get fairly expensive. My experience is that lenders will also throw all sorts of curve balls at the application, they're basically not keen on these types of deals.

A better solution is to present the deal to the lenders as if your existing house will become an investment property. The additional rental income will be used for servicing. Again, this might not be what actually happens, but it does show the lender what the worst case scenario actually is in the event you can't sell the property.

Lenders are generally much happier with this scenario and you'll find you can usually get a better deal both immediately and going forward. There are also ways to build in affordability for the peak debt of $1M to ensure you can manage it and not end up selling quickly just to clear debt.
 
Thanks for the brilliant and thorough reply Peter.
I had heard that bridging finance is not an ideal solution and in almost all cases an alternative method can be used. I did however think it was on the peak amount so interesting to hear it is on the end amount.
Your solution turning the home into an IP (even though this may not happen) Makes much more logical sense.

Thanks again and enjoy your Easter (if you brokers get to enjoy time off that is :))
 
What Peter suggested is what can often be an underutilised solution to bridging. There are limited lenders who offer bridging and as Peter said, interest rates may not be that attractive for a period.

However what can be an issue if you do not plan for it is having the deposit required for your new dream home.

If you have time, look to set up an additional LOC facility on your existing PPOR sufficient to cover the deposit and probably the additional 10% plus stamp duty and costs required to settle your new PPOR (plus a buffer).

You then have the option of going to a different lender for the approval for the 80% loan for your new PPOR and as Peter suggests, have sufficient time to sell your existing PPOR for a price you want, rather than having to scramble due to increasing interest costs. That presumes you can show servicing for the existing loan, the new LOC facility and the new loan for the new PPOR, including a rental appraisal for your existing PPOR (intended IP). An alternative is to use your existing lender and cross securitise but that is fraught with some possible retention issues and limited to what they calculate for servicing.

Good luck with it.
 
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