Bridging loan or deposit bond?

rabbit-reading-the-paper

Bridging loan or deposit bond?

When selling one property and purchasing another simultaneously, the funds from the sale may not be available in time to use for the purchase deposit.  There are typically two options in this scenario: a bridging loan and a deposit bond.

 

Bridging loan

 

A bridging loan is a short-term home loan intended to allow you to initiate the purchase of a property before you’ve sold your previous property.

 

Loan terms are often between six and 12 months and bridging loans generally have a higher interest rate than traditional home loans.

 

This can be a great option but carries some risk. It’s important to know that you will be able to make the repayments even in a worst-case scenario where your old house doesn’t sell as quickly as you’d hoped or where the property value may change without warning.

 

It’s important to talk to a mortgage broker and ensure that you have the ability to service the loan for the period of time required.

 

Deposit bond

 

A deposit bond is a tool that, upon agreement with a vendor, can replace the requirement of a cash deposit when purchasing a property.

 

This can be a relatively cheap method of initiating the purchase of a property usually without the need to make cash available.  The cost of a bond can vary depending on transaction intricacy and the term sought.  In a simple transaction, it is likely to be approximately 1.3% of the amount of the deposit.  For example, for a deposit guarantee to the value of 10% of a property price for someone purchasing an established property in NSW and a that guarantee valid for 6 months on a $50k deposit for a property purchase of $500k, the fee will be about $650.*

 

A deposit bond is issued by an insurer to the vendor of the property for either the full or partial deposit required.  At settlement, the purchaser must pay the full purchase price including the amount of deposit.  At this point, the deposit bond becomes invalid.

 

If the purchaser fails to complete the purchase of the property, the vendor is able to give the deposit bond to the insurer who will provide them the entire value of the deposit bond.

 

The insurer will then seek reimbursement of the deposit bond from the purchaser.

 

Deposit bonds are generally a fair bit cheaper than a short-term loan, but it’s important to talk to a mortgage broker to compare the two, taking into account your requirements and objectives and your financial situation.

*this is an estimate

 

Do you need advice? Call Chris today on 0490 075 039 or send an email to info@chardon.com.au