Beware a bridge too far

Think long and hard - and get advice - before taking on bridging finance. Photo / Getty Images

Have you found the perfect home, but not sold yours? Bridging finance can allow you to sign on the dotted line of a sale and purchase agreement so that you don't miss out.

A bridging loan is a short term loan that can help pay for a new home when you haven't sold and released your capital from the old one.

Luke Jackson, chief executive of Southern Cross Financial, says the interest rates on bridging loans range from 8 to 10 per cent.

Often the interest payments are capitalised, which means the interest rather than being paid each month is added to the balance of the loan.

At the end of six months - or earlier if they sell - the new property is refinanced through a bank.

The market for bridging finance was particularly hot last year when houses were selling fast, says Jackson.

People are sitting on their hands a little bit more now, he says, and being more conservative.

The most common situation in which bridging finance is used is if you have sold one property and bought another but the settlement dates don't quite match.

Or if you've bought, but haven't yet sold your existing property and need money to tide you over.

The latter is more risky than the first. If you subsequently find you can't sell your existing property or aren't willing to accept the offers on the table because you expected more, then you can be left holding a very expensive baby.

In a rising/hot market, using bridging finance can be a really good move. Your existing property should sell quickly if it's priced to meet the market.

Sometimes, says Jackson, the seller can make a little more on the sale in the intervening time.

The risk is that the market slows while a homeowner has a bridging loan and can't sell. In that situation, says Jackson, lenders will often suggest you put both properties up for sale and see which sells first.

Or if you can refinance one of the properties as a rental, you can keep it tenanted until the market turns and you're able to sell.

It's a popular topic in real estate forums and there are stories where it went without a hitch.

Paul and Brenda from Morrinsville had just that experience.

"We recently did this. But we were mortgage-free on the other house," they wrote in a forum.

"Turned out we only had to make one payment for the new house before money came through for our old house. Super-quick sale. Cash buyers, too, so almost immediate money turnaround."

Of course bridging finance on a property in Morrinsville where the median price is $372,000, could be a lot less painful than paying interest on a home in Herne Bay, Auckland, where the median price is $2.33 million.

Open bridging loans, where the first property hasn't sold, aren't as easy to get as they were a few years ago.

The Responsible Lending Code, which was introduced by the Credit Contracts and Consumer Finance Amendment Act 2014, is having an effect on people whose properties don't sell in time says Jeff Royle, mortgage broker at iLender.

The Reserve Bank of New Zealand's loan to value ratio (LVR) restrictions also don't help. If the home owner couldn't sell in the past within the six-month period of a bridging loan, they could refinance.

In many cases the code stands in the way of homeowners extending the bridge, says Royle.

Increasingly, homeowners who do want bridging loans need to go to non-bank lenders, says James Lockie, director of General Finance.

Typically, says Jackson, Southern Cross will take security against both properties. The loan for bridging finance can go wrong if the property doesn't sell.

These loans are often too expensive to hold on to long-term. Or sometimes the bank or other lender may call them in.

That's exactly what happened to Wellingtonians Erica and Thomas, who were caught holding an expensive Auckland property.

"We did it, and our very desirable (we thought) house in an Auckland inner suburb didn't sell for months and months, and it's taken us 10 years to get back to where we would have been financially if we hadn't taken that bridging loan," they posted.

Charlie from Levin added: "This is what happened with my parents. They bought one property on bridging finance while their house was on the market, back about 10 years ago, and then had to lower the price of the house by $50k to sell it.

They had four offers fall through in the 12 months between when they purchased the new property and when the original property sold, due to the purchasers' homes not selling."

Jackson recommends that home owners seek advice from their financial adviser/mortgage broker before choosing bridging loans.