What is ‘bridging finance’?
So, you’ve heard the term ‘bridging finance’, and you think it might help you buy your next home, without the challenges of selling your old home beforehand. But what exactly is it? And how does it work?
Bridging finance can be a useful option for individuals or households who want to avoid multiple moves or align the settlement of a new house with the sale of their existing one. Here's a breakdown of the steps involved in the process and some key considerations:
Time Frame: The time it takes to obtain a bridging loan is similar to a standard finance application, typically ranging from 2 to 4 weeks. The process includes application, pre-approval (or approval if a house has already been found), and the necessary data collection.
Loan Structure: Bridging finance typicially consists of two separate loans. The first loan, known as the "end debt," is used to support the purchase of the new property. It functions like a normal loan, typically with standard interest rates applicable from the day of settlement. The second loan is a short-term loan used to refinance the existing loan. It is typically an interest-only loan, where the interest is capitalized into the debt. Monthly interest repayments may not be required during this period.
Repayment: The bridging loan is designed to be repaid once the existing property is sold. At settlement of the outgoing property, the loan and the accumulated interest owed are combined, and the loan is paid out. This repayment structure is based on the understanding that the bridging scenario involves taking on more debt than can be sustained in the long term, with the intention of repaying it through the sale of the property. Sufficient equity in the outgoing property is typically required to support this arrangement.
Suitability: Whether bridging finance is the best option for buying a new house depends on individual circumstances and preferences. It can be particularly beneficial in situations where multiple moves or aligning settlement dates are going to be difficult to achieve. However, there is no definitive "best" or "worst" way to purchase a house, and it's important to consider personal financial goals and seek professional advice to determine the most suitable approach.
It's worth noting that the specific terms, interest rates, and fees associated with bridging finance can vary among lenders and not all lenders offer bridging finance as an option. Therefore, it's essential to carefully review the terms and conditions, compare options, and seek advice from your Tribe before deciding on bridging finance as a solution.
If you think bridging finance is for you, then let’s make a time to chat.