Funding your downsizing journey: what are the options?

When the time comes to downsize, you’ll need to decide between buying your new home first or selling your existing home first. It can be a tricky situation as most people don’t want to sell until they’ve found a new home, and many can’t buy until their old house has been sold.

If you are thinking about downsizing and wanting to buy before you sell, then you may have considered getting a loan to fund the purchase of your new home. The alternative is to dip into your investments, but this may leave you short or it might trigger other consequences, for example selling of shares may trigger Capital Gains Tax or using money from your superannuation may have a negative impact on your cash flow.

On the other hand, if you’re thinking about selling before you buy, you are faced with another set of challenges: you don’t know where you are moving to and when, and you don’t know the price you need to pay. And if you can’t find a home you are happy with before your home settles, then you might end up moving twice, which comes with its own set of administrative and logistical challenges.

To avoid the headache and costs of selling before you buy, people have often turned to one of two borrowing options: a bridging loan or a reverse mortgage. But recently, there’s an attractive third option that’s become available, which has been specifically designed for downsizers.

What is a bridging loan?

As the name suggests, bridging loans are there to bridge the financial gap between buying your new home and selling your existing home.

They are short-term loans that have been specifically designed to cover the purchase price of your new home and give you time to sell your current home. Because they are made for this purpose, they cater to the possibility that you may have an existing mortgage on your current home.

Before you rush in and get a bridging loan, there are a few things to think about. For example, a bridging loan will generally have a maximum term of six or 12 months before the lender will “call it in”, in other words, when they require you to repay. You need to be certain that your home is going to sell, and you are going to get the price you need in that period of time. In a worst-case scenario where your home hasn’t sold, you’ll need to ask yourself if there is enough equity in your new home that you could transfer the debt? Or you may need to drop the price to get a sale.

Reverse mortgages

The first thing to know about reverse mortgages is that you typically need to be at least 60 years old to borrow, if you are a couple then normally the youngest borrower needs to be 60 or older. Reverse mortgages enable you to access the equity in your home as a lump sum or regular payment – in the case of buying your new home it would be a lump sum that you are borrowing.

The amount you can borrow through a reverse mortgage tends to be a lot less than other loans because you only need to repay the loan when the house is sold, or you pass away.

As a general rule, if you’re aged 60 then the most you can borrow would be 15% of the value of the property. The amount you can borrow typically goes up at around 1 per cent per year, so if you are aged 70 then you could borrow around 25 per cent of the property value.

You typically don’t make any repayments while you have the loan, instead, they get added to your loan balance with interest calculated on the outstanding amount.

A new way to downsize

Up until recently that was pretty much the limit of your options until a company called Downsizer introduced its deposit bonds.

A Downsizer Bond can help you to buy your new home before you sell by guaranteeing the deposit for you. It’s not a loan, it’s a guarantee.

With a Downsizer Bond you only pay a one-off transaction fee of $1,650 (incl GST) plus the bond cost based on the value of the property you are purchasing. There is no lengthy loan application or valuation fees, just a simple online assessment. Once you submit the assessment, a Downsizer expert will help you through the easy application process and approval can take as little as 24 hours.

To qualify for a Downsizer Bond, the net equity in your current home (which is the value of your home less any debt) must be greater than the purchase price of your new home. The term of your bond can be as short as 6 months or as long as 66 months (5.5 years) which can be handy if you are buying a property off the plan.

Simply find out if you’re eligible for a Downsizer Bond, and Downsizer will do the rest.

The information provided in this article is purely factual in nature and does not take into account your personal objectives, situation or needs. It is not intended to imply any recommendation, opinion or advice. You should seek advice from a qualified professional about your particular needs, financial situation and objectives.