Bridging finance can be an extremely helpful form of finance, but is often not used because consumers don’t really know about its existence. Who would need this and why would it be helpful?
As a very common scenario, people will look for a new house before they have sold their existing home, sometimes even before their house is on the market. While this may seem intuitive, the reality of this is that normally it’s very stressful because if they actually find a property that suits them, they may need to offload their property quicker than they had anticipated or can’t take advantage because they won’t be able to get finance.
In consumer finance terms, this is what bridging finance is all about. If you have a decent amount of equity in your property, and adequate income, banks can lend you the purchase price of the second home, without you having to have sold your first yet.
Naturally, your debt amount will increase by the amount of the purchase price and fees, such as stamp duty, but because it’s a bridging loan rather than another standard loan, the term is very short as the bank knows it’s a temporary arrangement. Certain banks can help with repayment options as well, which can be of great assistance, such as making the loan interest only or capitalising the interest, so there’s no actual cash transferring at all during the period.
There are different rules between the banks – some will require you to have sold your existing property as a pre-requisite to approving the bridging loan – others are more open, and don’t require the sale yet. Some will help with the deposit as well, offering deposit guarantees on the property being purchased.
The bridging loan is perfect for construction loans if you go with a bank that doesn’t require you to have sold your home first, as you can purchase the new home, and wait until it’s built and you’re moving in before you put your existing home on the market. This will save you having to sell your existing home, then purchasing the house and land package, then renting somewhere else while it’s being built, with two big moves.
The downsides are the large increase in your borrowings, plus, if you can’t sell your home for your desired price, you may have to settle for a lot less to clear the debt before the bridging loan expires. However, this type of loan can be very helpful and can make the sale and purchase process a let less stressful if done properly.