You’ve probably heard of the term bridging finance. But what exactly is it – and do you need it?
We spoke to the experts at Capital Bridging Finance to find out exactly what a bridging loan is and how it can benefit you.
What is bridging finance?
Bridging finance, or a bridging loan, is a short-term loan that is typically taken out ahead of a longer-term financial solution.
It is acommon way to finance the purchase of a new property before you’ve sold your current home.
For example, if you’re already a homeowner and you want to upgrade or move, chances are you’ll need to use the proceeds from the sale of your current home to pay for the cost of the new one.
This can be a problem if you want to buy before you sell.
A bridging loan ‘bridges the gap’ that exists in this scenario – it provides the funds when you essentially own two homes while you wait for the other one to sell.
A bridging loan could help you buy your dream home. Picture: realestate.com.au/buy
At Capital Bridging Finance, bridging loans are designed to provide fast and flexible solutions. Traditional banks or lenders typically take longer, while they may also be more restricted with what they can lend and to whom.
“Bridging finance is about providing quick financial solutions for people that are buying and selling properties, or have business opportunities or challenges, and they don’t fall into the traditional boxes required by the banks,” Capital Bridging Finance CEO Damien Simonfi says.
What are the terms of a bridging loan?
Bridging loans come in all shapes and sizes. However, there are some standard features.
Firstly, bridging loans are short-term by nature. The length of a bridging loan may vary between a couple of weeks and a couple of years.
Secondly, given the short time frame, interest rates will traditionally be higher than those of your standard long-term loan. However, these will also vary based on your financial situation, as well as other loan and market conditions.
How do you make repayments on a bridging loan?
Simonfi says the repayment structure can be catered to the needs of the borrower.
There are three main ways to structure your repayments which include the following:
1. Capitalising interest
This could be a good solution for those with existing assets who may be looking to sell a property and downsize.
In some cases, you may be able to delay interest payments until you’ve bought your next home. Picture: realestate.com.au/buy
“If you’re just selling your property, you don’t need to make monthly repayments,” Simonfi begins.
“Under this structure you make no payments at all. Then, at the end of the term, you make all the repayments, plus the capital you’ve borrowed.”
2. Paying monthly in arrears
If you’re selling your house and taking out a bridging loan until you sell your current one, it might require that you service the loan which means making monthly payments.
“If you’re buying a house and you’re planning to go to the bank to refinance later on, what we would recommend is making monthly repayments,” Simonfi explains.
3. Pre-paid interest
In some circ*mstances, you may want to opt for prepaying the interest.
“If you’re borrowing a million dollars to buy a house [for instance], you might want to borrow the interest as well,” Simonfi begins.
What this means is you are borrowing the principal amount required for your purchase as well as the monthly interest component.
The bridging financier holds onto this and then makes a payment for you each month.
This particular style of payment works most effectively when your exit strategy from your bridging finance company to a mainstream bank is to refinance.
“This shows the incoming lender you can make those monthly repayments, that you can afford the loan you currently have and the one that you may be going into,” he says.
“It provides a security to ensure that your loan history is consistent and thus safer when trying to obtain refinance.”
What are the pros and cons of a bridging loan?
Pros:
The main pro is that you can access finance quickly to make important commercial or life investments.
Do you need to buy your new home today but you’re waiting for your bank to approve your mortgage? Do you run a business that needs an immediate financial boost to allow for a larger profit? This is when you may need a bridging loan.
Depending on your lender, your bridging loan can also be approved quite quickly.
While pre-approval – or actual approval – for a traditional mortgage may take weeks or months, bridging loan approval with Capital Bridging Finance can take 24-48 hours.
Bridging loans allow you to move quickly – a considerable perk when it comes to shopping real estate. Picture: realestate.com.au/buy
Finally, it can reduce the stress of buying a home.
A bridging loan can mean you don’t have to sell your home first in order to buy your new one. This also means avoiding added costs, like renting while you shop around.
Cons:
Some of the cons of bridging finance include additional fees and costs compared to some loans with traditional lenders.
Simonfi says a common misconception is that all bridging finance lenders are riddled with large upfront fees, hidden costs and Inflexible terms and conditions.
While you are likely to incur application or valuation fees with any lender, transparency is critical when entering into a bridging finance loan.
However, he says to beware of locked-in terms.
“At Capital Bridging Finance, if you want to borrow money for six months while you’re buying and selling your home or investment property, you’re able to repay at any time, without any hidden fees, costs or charges.
“There’s no penalty to repay us early — I think that’s really important.
“We aim to understand what the borrower’s requirements are when they come to us. We understand urgency, price point and flexibility, and primarily only paying for what funds are utilised. Not all other lenders of bridging finance will do that.”
This article was originally published on 6 May 2021 at 9:00am but has been regularly updated to keep the information current.
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