Your Complete Guide To Bridging Finance

Bridging finance assists when you need to buy a new house before selling your old one. A bridging loan is a temporary measure and can be either an open or closed bridging loan.

You need to repay this loan as soon as possible, usually within 12 months of taking it out. This newsletter is designed to help you understand the pros and cons of bridging finance and to assist you in determining if this type of loan is best for your situation.

Why do we sometimes need bridging finance?

Generally, you would sell a house before buying your next one. However, sometimes the settlement dates don't line up, which causes you to look for funds that can "bridge the gap."

How can bridging finance assist you when you want to build a new home?

Sometimes, building a home can take up to a year. Bridging finance could finance your construction while you continue to live in your current residence. When the new home is ready to be occupied, you sell your existing home to repay your bridging loan.

 
What are the different types of bridging finance?

Closed bridging finance

This type of bridging finance is used when you have a signed sale and purchase contract, and the sale is now ‘unconditional’ but the settlement date falls after the settlement date for your new property. This is when closed bridging finance would be utilised. This is the least complicated form of bridging finance and has a set repayment date. This type of bridging finance usually needs to be repaid within 12 months.

Open bridging finance

This type of bridging finance is used when you need funds to settle on a new property (or finance a property build) before you have a signed contract for your old property. This type of bridging loan carries more risk as you do not have a signed agreement.

 
Examples of Bridging Finance

Mark and Fiona (Open Bridging Loan)

Mark and Fiona's family is growing and has decided they need a larger home. They put their home on the market and began browsing property listings. As fate would have it, they found the perfect dwelling and bought it with a settlement date of 60 days (30th August).

Unfortunately, their current home is not selling quickly, and as of mid-July, it still has not sold. Mark and Fiona are worried they might not be able to settle on their new dwelling, so they approach Jonathan to apply for bridging finance.

The purchase price of their new home is $1,250,000. Even though they have a decent amount of equity in their current home, they need a bridging loan for the entire amount. Jonathan sources the right lender who offers them open bridging finance at a rate of 7%. Open Bridging Finance will cost Mark and Fiona $1,683 and must be repaid within one year.

Dream retirement home for Joy and Bob (Closed Bridging Loan)

Joy and Bob are looking to downsize and move into a smaller home for their retirement on the North Shore. When a townhouse in Northcote comes onto the market, they quickly place an offer, and the settlement date is in six weeks. Their current home sells quickly, but the buyer wants a longer settlement. This means that Joy and Bob cannot settle and purchase the townhouse at settlement and need to contact Jonathan for a closed Bridging loan. Joy and Bob have a signed, unconditional contract and a confirmed settlement date.

 
What does a bridging loan cost?

Bridging loans come with the lender’s floating rate. As a rule, you will pay interest only until you settle the bridging loan. 

How do you get a bridging loan?

SOS Non-Bank will take you through a process to determine the right lender. Your financial circumstances will be discussed in detail to ensure that you are eligible for bridging finance and have the capacity to repay the loan.

I hope that you find these lending tips and strategies useful to you.

If you are looking for assistance, please contact us today.