It's a tall order to line up contemporaneous sales and purchases of homes. As a result, sellers sometimes have to resort to short-term mortgages called bridging finance to tide them over for a few weeks or months until they can sell their old property.
Aucklander Catherine Baker needed bridging finance for three weeks in July/August this year. She had found a new apartment and had an agreement to buy it conditional on the sale of her house. The buyer of her old home wanted a 60-day settlement, which ran three weeks beyond the apartment contract deadline.
Baker's agent said she should get a bridging prior to auction. Baker worried for weeks that she wouldn't be able to settle on the apartment she had set her heart on.
Her long-time mortgage broker, Christine Lockie of LoanPlan, organised the bridging finance through the ASB. Banks do provide bridging finance, says Lockie, but only if there is an unconditional sale and purchase agreement on the property being sold. Not on open-ended bridging.
Although the transaction ran smoothly, Baker would have preferred not to have needed bridging finance.
"I had to get two extensions (on the apartment) and it was incredibly stressful," she says. "It did make the whole thing work. But at a cost."
The need for bridging finance added to her legal fees' costs, an extra valuation was needed, and the entire process took a lot of her time.
Where possible Lockie arranges bridging finance through banks because it's cheaper. If not, there are lenders who do open-ended bridges -- at a cost. The ASB was charging 6.25 per cent in July when Baker got her loan. At the same time second tier finance companies were charging as much as 8.5 per cent plus fees.
On a $1m loan, says Lockie, that would be the difference between $1200 a week and $1600 in finance costs. What's more, there may be an "early repayment" fee on the more expensive finance company loan if it was paid back before six months.
Buyers often assume their main bank will lend bridging finance. If it doesn't, they can panic. A mortgage broker can help. They often have clever solutions up their sleeves.
Clients of LoanMarket adviser Craig Pettit needed a five month open-ended bridging loan in July, and their bank, BNZ, wouldn't provide the finance.
"One of my private lenders provided funds to refinance the existing BNZ loan, provide funds to settle the new property, plus capitalise the five months' interest and fees," says Pettit. "This means (my clients) are not having to cover interest costs."
The loan will be cleared and the interest and fees repaid from the eventual sale of the existing property.
There are other rules, such as lenders generally don't want to provide more than 70 per cent loan to value ratio on bridging finance.