Be aware of bridging finance during this low supply high demand market. The low stock and great auction outcomes are leading many sellers to consider bridging finance. As an agent in the industry for decades my advice is to sell first.
What is bridging finance
Bridging finance is a short-term loan that can be utilised by sellers to purchase another property whilst they sell their existing property. Your existing property is used as security and the bridging lender will give you a loan to purchase your new property. You will repay the loan when your existing home has sold.
It is important to understand that in many instances you will pay per month your existing mortgage repayment as well as the ENTIRE price of the new home as another mortgage repayment. That is, if your new home price is a million dollars that is the new loan repayment you add that to your existing repayment. This is very stressful if your house does not sell uber quickly for the price you need to complete your new property purchase.
There are benefits for bridging finance but this is one loan that needs to be very carefully considered.
Bridging loan benefits:
- to create liquidity that allows you to purchase a home before another property has sold;
- generally quick arrangement, from 3 days to 3 weeks;
- alleviates funding gaps;
- provide borrowers with an immediate cash injection;
- helpful for auction purchases where there is a set date;
- can be sourced from non-bank lenders – less scrutiny than traditional lenders;
The negatives of bridging loans
Clearly, not missing out on a property you consider a great investment is beneficial and bridging loans help you secure that asset. However, there are very considerable cons with bridging loans.
- The biggest drawback is higher borrowing costs. Bridging loans are a quick and convenient finance arrangement and lenders charge for this expediency.
- Generally, the interest rates for bridging loans tend to be high in comparison to other funding and borrowers are offered options for repaying the interest. This includes paying monthly or rolled-up interest that’s paid at the end of the loan – this can be tens of thousands in Australian capitals.
- Bridging loans are secured against an asset, usually property often the family home.
- All bridging loans require a Personal Guarantee, which means the borrower has personal liability. If the borrower defaults on the loan, the lender can force the asset to be sold. Furthermore, if there’s a shortfall between the property selling price and what the lender is owed, they can call on the personal guarantee. Meaning the borrower could lose other assets as well as those they borrowed against.
- Some bridging loans are offered by unregulated lenders. Whilst unregulated lenders can assist applicants with less-than-perfect credit loan opportunities, complete quickly and are flexible there are pitfalls. Unregulated borrowing arrangements are riskier.
- Bridging loan processes that are regulated gives borrowers protection if they are sold an unsuitable product or given incorrect advice from lenders or brokers.
As an agent, I never offer advice to clients about lending. However, as I am currently witnessing bridging finance stress, I would really like to suggest sellers sell first. There will always be another property and you really don’t want to feel sick with anxiety over money it really is not WORTH it.