Buying your first home is a great feeling – but what about when you want to upsize or even downsize to another property? Many people find all of their cash for a down payment is tied into the equity of their existing home.
This poses the problem when you find your next dream home and are unable to make a down payment because you have to wait for your current home to settle to secure the funds you need. Often people feel they have been locked into a catch 22 situation. There is a solution to this problem commonly known as bridging finance.
Bridging finance is a short term loan that provides you with the funds for your down payment so you are able to move forward. This attribute is a bridging loan’s most important advantage. Providing the funds for the additional fees included when selling and buying funds are an additional frustration added to moving and with the bridging loan you are able to incorporate them into the loan.
This allows for a much smoother transition and you aren’t leaving any fee unpaid which can slow your process considerably. Having the bridging option gives you the ability to go after your dream home proactively and not miss out on an excellent opportunity.
Another advantage linked to bridging finance comes from the ability to secure the funds through a quick and efficient process and covers many situations. The most popular situations that arise are for pre-sale renovations, construction and auction finance. With this type of short term loan having a clear exit strategy, which is your plan to pay the loan at the end, will allow you to move quickly.
Along with the advantages of a bridging loan, there are also disadvantages. One disadvantage is the interest rate you pay will be higher than a standard home loan due to the risk and duration. As the short term loan generally covers a duration of up to a year the opportunity for a greater return for the lender is reduced so they must push up interest in order to make the loan worthwhile.
The risks involved for the lender come from the possibility your current property doesn’t sell. Though if this is the case there are other options available, such as refinancing, that will pay out the debt but they must account for the risk.
When you take out the short term bridging loan, it is important to be aware that until your current home sells and settles, you will be continuously incurring the interest on the loan.
If you are unable to sell your property quickly you may be facing large interest payments which will cut down the amount you receive from the house selling. Additionally, if you are forced to sell at a lower price than your original plan, the amount you are able to take home for yourself is lower.
Bridging loans can bring great benefits and risky disadvantages, but if you are in need of funds to allow you and your family to obtain that great property or to do some major renovations, it could be what you have been looking for. It is important to understand the good and bad that comes with the loan so you are able to make an educated and good choice for your situation.
Andrew has been working in the finance industry for several years. He offers tips on consolidation loans and caveat loans.