Downsizing: Bridging the Gap


Downsizing to a smaller home should be a simpler task than moving into a larger home or buying your first property. Your current home may have a much higher market value than that of your target home, putting you in a great position to relocate and have plenty of extra money left over.

Or at least, this is how the whole thing should work on paper. In practice, it rarely works out quite so straightforwardly.

Having built up plenty of equity in a home is all well and good, but converting this equity to cash to buy a new home is not always easy. Prior to purchasing your next home, you first need to find a buyer for your current home. A process that means not only finding an eligible buyer but waiting for their mortgage application to be processed (assuming it is successful at all).

In the meantime, the risk remains of being beaten by a competing bidder. If another interested party is able to buy your target home faster than you, chances are that is exactly what they will do. Likewise, if you have lined up a buyer for your current home who backs out at the last minute, you are back to square one.

Breaking the chain

This risk of a broken property chain does not apply exclusively to more standard moves or when upgrading to a larger home. Even if you plan to move to a home that is significantly smaller and lower in value, you still face the prospect of being beaten to the finish line.

In fact, the growing demand for smaller homes that are affordable to run has resulted in a situation where competition for these types of homes is growing at a much faster rate than competition for larger homes. The more people there are bidding for the select properties available, the higher the chance of a broken property chain.

But there is a way to almost entirely eliminate the risk of a property chain crashing down at the worst possible time. Increasingly, homeowners are setting their sights on short-term bridging finance to ensure they are at the front of the queue. With bridging finance, it is possible to tap into most (up to 80%) of the equity you have in your home in a matter of days.

A flexible and affordable solution

Bridging finance is issued in the form of a short-term loan (usually over a term of no more than 12 months), secured against the home of the applicant. With all the essential paperwork in place, the funds can often be accessed within a few working days.

This money can then be used to purchase a smaller home for cash while their previous home remains on the market. When their former home sells for its full market price, the loan is repaid in full, and the remaining proceeds are retained. Charged at around 0.5% per month or less, overall borrowing costs on a bridging loan can be extremely low.

As cash buyers are often afforded significant discounts on property prices for fast transaction completions, the savings made could augment the costs of the facility in its entirety.

Best of all, bridging finance eligibility requirements are far more relaxed than most comparable products. You simply need sufficient equity in your current home to cover the costs of the loan and evidence that you will be able to repay the loan by the agreed-upon date (exit strategy).

Once a financial product used nearly exclusively by property developers and investors, competition in the housing market has propelled bridging finance into the mainstream lending sector.