Bridging Finance, what is it? How does it work? Is it right for me?

Bridging Finance

You may have spotted your dream property that you have envisioned for a long time but have not yet sold your current property. This could be due to it being currently leased to tenants, needing a quick lick of paint, or perhaps having other issues that require attention. However, you don’t want to wait in fear that you will miss your opportunity to buy into the current market.

We recently had a client with this exact dilemma; the client had a tenant in their existing property whose lease still had 12 weeks left; the tenant could not present the property for sale, but the client was desperate to move on and buy the dream property. On top of that, the client has that nagging knowledge that the market is getting stronger and not weaker.

So, the client reached out to us to see whether we could find a solution. In their case, Bridging Finance could be utilised; this enables the client to buy their dream home and provides twelve months for them to transition smoothly from one property to the next.

So, let’s delve deeper into Bridging Finance and discover what it is, how it works and if it is right for you.

Bridging Finance: What Is It?

Every lender has slightly different rules around this, but broadly, bridging finance is a short-term housing loan designed to provide immediate funding over a specific period, usually up to one year.  The loan is a temporary solution to "bridge" the gap between the need for funds and the availability of longer-term financing. Significantly, the servicing requirements differ, and the remaining (post 12 months debt) debt is the debt that is being assessed and not the entire loan.

How Does It Work?

Bridging finance works by allowing you to borrow a specific amount of money against the value of a property. The key features include:

1. Loan structure: You have two loans, the remaining loan (usually 30yrs/P&I) and the bridging loan (usually interest only over 12 months)

2. Slightly High Interest Rates: Given its short-term nature, bridging finance generally has a slightly higher interest rate than standard loans.
   
    Tip: The case above the client was selling an investment property, and was able to claim back the interest repayments against the income from the property to help offset the costs.

3. Security Requirements: Lenders require holding both properties as collateral secured against both loans. The bridging loan is generally secured against the property being sold, while the remaining loan is secured against the property being bought/held.

4. Flexible Repayment Terms: The bridging loan has interest-only repayments; it’s repaid when the existing property is sold.

5. Fees and Costs: In addition to interest, arrangement fees, valuation fees, and other costs may be associated with the loan.

Is It Right for Me?

Bridging finance can be suitable if:

• Bridging Finance is usually used for owner-occupier properties but can be used for investment properties.

• You have a short-term financial need or opportunity, such as purchasing a new property before selling the old one.

• You are confident in your ability to sell your property within the bridging period.

However, it may not be the right choice if:

• You are uncertain about how or when you will be able to repay the loan.

• You have a limited financial buffer and might struggle with higher repayment costs while waiting for a property to sell.

• You do not have a clear strategy for exiting the loan, such as securing a mortgage or selling the property within the loan term.

What will it look like?

Please see the below example:

The client has an existing property worth AU$1,000,000 with an existing loan of $200,000.

The property they want to purchase is valued at $1,500,000.

The total value is, therefore, $2,500,000. This lender's maximum LVR is 80%, so we can borrow $2,000,000, but how should we split it?

Please note the existing loan gets paid out by the new loans.

The new loans are a $900,000 bridging loan (1 yr interest-only loan) and a $800,000 remaining loan (30 yr loan, P&I), so we keep within the 80% LVR rule. With the remaining loan we have $100,000 spare for stamp duty and sales costs. We chose this split because the idea is that the bridging loan, which is being repaid upon the sale of the existing property, will be totally extinguished.

The purchase occurs, then when the existing property sells, the sale proceeds pay off the bridging loan, leaving the remaining loan in place to be paid off over the next 30yrs.

Before choosing bridging finance, it is advisable to assess your financial situation, consult with a financial advisor, consult your mortgage broker, and carefully evaluate the terms and conditions set by lenders.

If you have any questions about your current financial position or whether a Bridging Loan is right for you in your circumstance, please contact Adam Kingston from Australian Expatriate Finance.

The Expatriate always tries to make sure all information is accurate. However, when reading our website, please always consider our Disclaimer policy.