Bridging Finance Home Loans

How Can You Benefit from Bridging Finance?

What is bridging finance?

As the name suggests, bridging finance (e.g. a bridge loan), is a type of finance that typically helps businesses and investors manage the cash flow gap that can occur between the purchase of one asset and the sale of another. With the ability to be organised within 2-3 days, bridging finance is also useful for business purposes such as: buying business equipment, unexpected business costs or for expanding and acquiring new business; and for personal use to buy shares, pay bills and most predominantly invest in or build property. A bridging loan is most useful to help manage the fees and charges associated with purchasing and selling property, and normally lenders will agree on terms no longer than 12 months.

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Home Loan	Details	Interest Rate (p.a.)	Comp Rate^ (p.a.)	App Fee / Ongoing Fee	Max LVR	Min & Max Borrowing
Illawarra Home Loans Bank Beater Home Loan	Pay off your loan faster with a low variable rate and a further rate cut by 0.05% p.a. after 5 years.	6.18%	6.46%	$0 / $345	90%	$250,000 / $1,000,000
State Custodians Mortgage Company Standard Variable Offset Loan	Awarded the 2011 Non bank Lender of the Year this feature-packed loan rewards customers with a bonus rate drop of 0.20% after 5 years.	6.22%	6.45%	$0 / $345	95%	$150,000 / $2,500,000
HomeStar Advantage Loan	A low rate, fully featured loan with no fees and unlimited redraws.	6.53%	6.53%	$0 / $0	95%	$150,000 / $2,000,000
HomeStar No Fee 100% Offset	No fees and zero mortgage insurance.	6.46%	6.46%	$0 / $0	90%	$250,000 / $750,000
Bankwest Premium Home Loan	No application fee on offer for a limited time only.	6.60%	6.65%	$700 / $ 0	95%	$20,000 / $200,000

New Property Purchase

Knowing that the sale of one property can often coincide with the purchase of another, and that the slightest of delays can cause major issues, the goal of bridging finance is to eliminate any financial obstacle so the transaction can proceed. It is not uncommon that the money from this type of finance will be used to pay the lease on the existing property for as long as it remains on the market.

Loan Approval

Like everything, there is a process to go through before a bridge loan is approved. By completing the pre-approval process you can determine the amount a lender can give to you, which will mainly be based on the amount of collateral you own. Collateral is anything of significant value (such as, heavy machinery, business equipment, inventory or other property) that you and the bank agree, they will take ownership of if you fail to pay the loan back.

The different types of bridging loans

The 2 main types of bridging loans are known as: Closed Bridge and Open Bridge.

• Closed bridging finance is aptly named because the date for exiting the loan is pre-agreed upon as the date that the bridging finance will be repaid by. A closed bridge is only available to homebuyers who have already exchanged on the sale of their existing property, since very few sales fall through after exchange, and is therefore less risky to the lender.

• An open bridge differs in that it is taken out by buyers who have found their perfect property but don’t have an exact date to exit the bridging finance because they haven’t put their existing home on the market. In this instance, the bank is likely to ask a lot more questions and need information that supports the answers. The lender will expect to see the property details of the new property and want proof that your current home is being actively marketed. It will also insist you have a lot of existing equity in your current property and an exit strategy in case the sale falls through. Twelve months is the standard limit for an open bridge and as long as you have paid the interest during the period and the property hasn’t collapsed, then the bank will most likely negotiate an extension if needed.

Making Repayments

Having a good credit history and a sound relationship with your lender will go a long way in securing a bridging loan. However, even with good credit, expect a higher interest rate (between 12-15%); since the loan is short term (half a percent or more is typical). Usually, the factors that will be considered to determine the interest rate will be: the applicant’s calculated risk, the value of the items used as collateral and the amount of time the loan is needed for.

Your ability to repay the end debt is how your loan serviceability will be calculated. The end debt is the remaining loan balance, once your existing property is sold and the proceeds from the sale have been utilized to pay the bridging loan. You will typically have a period of 6-12 months (the bridging period) in which to sell your existing property. In order to make bridging finance affordable for many borrowers who can’t manage two mortgages at the same time, most lenders do not require repayments during this period. Instead they will capitalise the interest during the period of bridging finance (add it to the total loan amount) so there are no scheduled repayments, or they will require scheduled interest-only repayments.

Examples:

1. You have a $250,000 mortgage on a $500,000 house and want to buy a new home worth $400,000 plus costs of $50,000, which brings the new purchase cost to $450,000. Your new Bridging Loan will cover the initial $250,000 to pay out the existing mortgage and also the $450,000 for the new purchase bringing your total loan to $700,000.
   Once the property has been sold (in this case for $500,000) this amount (is then put towards the mortgage which consists of the original $700,000 loan + capitalised repayments. This reduces the mortgage to $200,000 + capitalised repayments. You can then continue to make standard loan repayments with a standard mortgage.
2. A bridge loan is often obtained by developers to carry a project while permits are approved. Since the project going ahead is not guaranteed, the loan may have a higher rate of interest and be from a specialized lending source that will accept the risk. Once the project is fully entitled, it becomes eligible for loans from more conventional sources in greater amounts, over longer periods and with lower interest rates. A construction loan would then be obtained to take out the bridge loan and fund completion of the project.
3. A bridging loan can be used by a business to ensure continued smooth operation during a time when for example one senior partner wishes to leave whilst another wishes to continue the business. The bridging loan could be made based on the value of the company premises allowing funds to be raised via other sources, for example, a management buy-in.
4. A property was inherited and needed some renovations to realise its true market potential. Whilst the stripping out of the kitchen and bathroom was being done, the owner applied for a mortgage. Unfortunately, the surveyor deemed the property uninhabitable due to the renovations and the owner was unable to get a mortgage. Instead, the owner applied for a bridging loan, which enabled her to completely renovate the property. As soon as this was done, the owner was able to go back to her mortgage broker and obtain one and start paying her bridging loan back.

What’s the catch?

While there are many advantages with bridging loans, there are some disadvantages too. In some cases, people may find it is a little harder to sell their existing homes as quickly as they thought, which means you’ll be up for a lot more interest since you’re now paying off two mortgages. Another catch is some people may be forced to sell their existing home for a lower price than was originally intended; so to combat the problem of out of control interest, you should consider placing short-term tenants into the property to help keep your interest costs covered while you’re trying to sell. Others may find they don’t quite have sufficient equity in their homes to qualify for a bridging loan.

Is Bridging Finance For You

A bridging loan should only be taken out in certain circumstances, like those mentioned above. If you are struggling to sell your property, having already found your dream home, then a bridging loan is NOT always the solution. It may be in your best interest to raise the finance to bridge the gap with a standard no-fee mortgage. By taking this option, you can clear the loan once the sale goes through and get a better rate of interest. If you are considering taking out a bridging loan, the lender may use your new property as security on the one you’re trying to sell; meaning, if you default, then both properties will be at risk.

What are the Features of a Bridging Finance Loan

The bridging finance loans have a lot of features. The features of a bridging finance loan are:

• Avoid taking out another loan. The main feature of a bridging finance loan is that it will allow you to avoid taking out another loan. Furthermore, the bridging finance loan will allow you to avoid having to pay two loans off at the same time.
• Interest only repayments. While you have the bridging finance loan you will not have to make full repayments on both loans. You will have to pay off your regular loan as you have been, and you will only have to pay the interest portion of the repayments on the bridging finance.
• Make the whole process easier. One thing that the bridging finance will do is that it will make the whole process a lot easier. The bridging finance will allow you to buy your new home when you would like so you can move in when you want and not worry about selling your old home.
• Lender will take security over both properties. While you are on a bridging loan the lender will have security over both the properties.

What are the Disadvantages of Bridging Finance Loans

While the bridging finance loans have a variety of advantages they do come with some disadvantages. The disadvantages of bridging finance are:

• Will need to know how much your home will sell for. When you get a bridging finance loan you should be able to accurately predict how much your old property will sell for. If it does sell for as much as you plan then you may find that you don’t have enough money to pay off the loan and buy the new home.
• The longer the sale takes the more interest you will pay. It can be hard to predict how long it will take to sell your old home. If the old home takes a long time to sell then you may find that you will have to pay a lot of money in the interest repayments.