What is bridging finance

If you’re a property developer, a landlord, a business owner or simply a homeowner in need of quick capital, a bridging loan may be an option for you.

What is a bridging loan?

Bridging finance (also known as a bridging loan) is a short-term loan used to ‘bridge’ the gap between a debt and the main line of credit becoming available. They are usually repaid over several months rather than years.

It’s best thought of as a temporary loan which gets you from A to B, until you either clear your loan or secure a more permanent form of finance.

What are the main uses of bridging loans?

Bridging loans can be used in both commercial and residential property transactions. Common use is to help people complete the purchase of a property before selling their existing home by offering them short-term access to money at a high-rate of interest.

This type of loan can also be an option if you are building a property, raising funds for a refurbishment or buying at an auction.

How do they work and how do they differ from other types of finance?

There are two types of bridging loans:

1. Closed bridge: the borrower will have a set date by which the loan will be repaid,
2. Open bridge: the borrower proposes a repayment plan but there is no definitive date upon which the borrower knows they can repay the loan.

As well as high interest rates, bridging loans may also come with higher administration and legal fees, which could add up to a significant amount.

Some lenders charge higher rates of interest and lower arrangement fees. Deciding whether to go for a lower rate of interest or a lower arrangement fee depends on your circumstances.

Paying a higher interest rate to pay lower fees could be a smart decision if you are confident the underlying sale will go through within a few weeks. If you think you may end up bridging for many months then the fee may become a smaller part of the overall cost.

It can take weeks to receive the funds from a term loan, but generally a bridging loan can be ready in 24-48 hours with relatively little documentation.

Things to consider

As they can be a costly method for covering a temporary shortage of credit, a clear exit strategy should be considered.

If you are taking out a bridging loan to fund the purchase of a new property, it is advised that you already have a buyer set up for your current property. A lack of this sort of exit strategy could result in serious financial issues when taking out a bridging loan.

Bridging finance isn’t for everyone. Depending on your circumstances, a bridging loan could be straightforward or complex. It’s worth discussing your needs with a qualified expert.

Something that is worth considering as a home and property buyer is our Loan Protection Plan. Whether you’re buying or refinancing, make sure you have a plan to protect your mortgage repayments in the case of involuntary unemployment, serious injury or even, death. Click here to find your local ALI-authorised mortgage broker or contact ALI Group today.

Loan Protection Plan is jointly issued by Hannover Life Re of Australasia Ltd ABN 37 062 395 484 (Death, Terminal Illness, Living and Accidental Injury Benefits) and QBE Insurance (Australia) Limited ABN 78 003 191 035 AFSL 239545 (Involuntary Unemployment Benefit). It is distributed by Australian Life Insurance Distribution Pty Ltd ABN 31 103 157 811 AFSG 226403 (ALI). ALI receives commission for each policy sold. Any advice provided is of a general nature only and does not take into consideration your personal objectives, financial situation or needs. You should consider the Product Disclosure Statement when deciding if this product is appropriate for you.