Emily and Ben Jackson recently purchased a new home and decided to buy before selling their previous property. (Source: Supplied)
Australia’s property market is booming, with a shortage of supply fueling price growth as buyer demand surges. Mortgage brokers say the mismatch is prompting more homeowners to turn to bridging loans to avoid being “caught out”.
Melbourne couple Emily and Ben Jackson recently purchased their new home in Montrose using a bridging loan. It’s a type of short-term loan designed to ‘bridge’ the gap between the purchase of a new home and the sale of your current property.
“We decided that we were paying such high rates for our mortgage. We fully renovated our current house and we had lots of equity sitting in it,” Emily told Yahoo Finance.
“So we thought, why not sell, buy something cheap, pay off a chunk of our mortgage and then renovate the next one.”
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The teacher and carpenter, who have three young boys, were spending $3,500 a month on mortgage repayments for their previous Mooroolbark home with a loan interest rate of 5.85 per cent.
“Things were tight with three boys and I only work three days. It was just a lot to be paying a big mortgage and not having much left to do fun family things and go on holidays and things like that,” Emily said.
But with a lack of properties available on the market, the couple decided to take the strategy of buying before selling.
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“We’ve been looking at the market for about three months and we realised that not much comes up in that suburb,” Emily said.
“Or if they do, they’re squillion-million-dollar properties. So we just waited and waited and waited until one came along and then put an offer in on it.
“We had put an offer in on another couple of homes not in that suburb and missed out. We just found there wasn’t a lot coming up on the market. When there was a home, lots of people were putting offers in on it.”
There is currently a huge mismatch between property supply and demand.
Cotality analysis found advertised stock levels were currently well below average across every capital city.
Over the four weeks to September 28, listings tracked about 18 per cent below the previous five-year average.
At the same time, estimates of sales activity through the September quarter were 7.3 per cent above the previous five-year average.
Advertised stock levels are currently well below averages, while sales activity is up. (Source: AAP)
“The number of homes for sale at the end of September was about 53 per cent lower than average in Darwin, 45 per cent below average in Perth and down 31 per cent in Brisbane,” Cotality research director Tim Lawless said.
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“At the same time, estimates for quarterly home sales are tracking above average, demonstrating a clear disconnect between demand and supply.”
Australian home values rose again in September, with national dwellings up 0.8 per cent, driven by strong growth across the capitals, where values rose 0.9 per cent over the month.
The national median home value is now $857,280.
Loan Market broker Jacob Decru said he had seen a 30 per cent increase in bridging finance enquiries this spring selling season.
He said it could be a “strategic” way to avoid the juggling act of buying and selling in the current under-supplied market.
“Sellers want to capitalise on competition but some are concerned about selling before buying when listings are so low,” Decru said.
“They’re worried about being caught out in a tight listings market, being forced to rent or put their possessions in storage for three months or longer while they find their new home.”
The tight listing market means some buyers are worried about being caught out if they sell before buying. (Source: AAP)
Decru said bridging finance wasn’t for everyone, so it was worth speaking to your bank or broker to weigh up the costs of the loan compared to the potential costs of selling before buying, such as seeking alternative accommodation.
It’s also worth keeping in mind that if you can’t sell your existing home for the price you expected, you may have to find more funds to cover the shortfall.
Interest rates for bridging loans will typically be higher than a standard variable mortgage.
After buying their new home, the Jackson’s put their previous property on the market.
It was online for three weeks before it sold for $1.51 million, a price the couple were “stoked with”.
Emily said there were risks involved with taking on a bridging loan, including it having a higher interest rate of 8 per cent in their case.
“We were fairly confident that our current house would sell quite quickly because it’s a big, fully renovated family home. We weren’t too stressed. But if we were to struggle selling our house, the rates are extreme,” she said.
“It’s a financial risk. But we found it was worth it because it meant that we could buy the right house.”
The family is now planning to move into their home after their previous one settles in the next month.
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