Unveiling Bridge Financing: Diverse Types Explored

By: Aaron Robbins0 comments

Bridging finance plays a vital role in the Australian property market, helping individuals and businesses overcome temporary financial gaps during the transition between property transactions. Whether you are buying a new home before selling your existing one or need short-term funding for property development, understanding the different types of bridging finance available in Australia is essential.

In this article, we will explore some of the common options borrowers can consider when seeking bridging finance.

What is bridging finance and how does a bridging loan work?

In Australia, bridging finance refers to a short-term loan that helps individuals or businesses bridge the financial gap between the purchase of a new property and the sale of an existing property. It provides temporary funding to cover the period between buying a new property and receiving funds from the sale of the current property — it is not a permanent financing solution.

Bridging finance is commonly used when individuals or businesses want to purchase a new property before selling their existing one but don’t have the cash flow necessary. This situation often arises when there is a time overlap between buying the new property and finding a buyer for the current one. Bridging finance allows the borrower to access the funds they need for the new property purchase, with the intention of repaying the loan once they receive the proceeds from the sale of their existing property.

More to know about bridging loans

Purpose of a bridge loan

Bridging finance is primarily used to facilitate the purchase of a new property while awaiting the sale of an existing property.

Bridging loan structure

It is typically a short-term loan with a term ranging from a few weeks to a few months. The loan amount is based on the equity in the existing property and the likely sale price.

Repayment of bridge loans

A bridging loan can generally be repaid in one of two ways:

  1. Through the sale proceeds: Once the existing property is sold, the borrower uses the proceeds to repay the bridging loan.
  2. Conversion to a regular mortgage: If the existing property does not sell within the bridging loan term, it may be converted into a standard mortgage with regular repayment terms.

Interest rates: Bridging finance generally carries higher interest rates compared to standard home loans or mortgages. The rates can be variable or fixed, and the borrower may have the option to make interest-only repayments during the bridging period. The interest costs and bridging loan cost will generally be higher than a traditional home loan, but remember it is only a temporary form of finance.

Lending criteria: The eligibility for a bridging loan is assessed based on the borrower’s ability to repay the loan, the equity in the existing property, and the expected sale price. Lenders may also consider the borrower’s credit history and financial stability.

It’s important to note that specific terms and conditions for bridging finance can vary among lenders in Australia, which is why working with a finance broker such as Diverse Funding Solutions can be beneficial if you’re seeking bridge financing.

The different types of bridge financing

Closed bridging loan

Closed bridging loans are the most common type of bridging finance in Australia. They are designed for borrowers who have a firm sale agreement in place for their existing property. These loans provide short-term financing until the settlement of the current property, allowing borrowers to complete the purchase of their new property. Closed bridging loans generally have a fixed term and require a definite exit strategy.

Open bridging loan

Open bridging loans are suitable for borrowers who have not yet finalized the sale of their existing property. These loans are more flexible than closed bridging loans, offering a longer borrowing period to accommodate the uncertainties associated with property sales. While open bridging loans provide additional time to sell the current property, they often come with higher interest rates due to the increased risk to the bridging loan lender.

Development bridging loan

Development bridging loans cater to property developers who require short-term funding for construction projects. These loans bridge the gap between the initial purchase of the property and obtaining long-term financing or completing the sale of the developed property. Development bridging loans are typically secured against the property being developed and are tailored to the specific needs of the project, including progress payment options and flexible repayment terms.

Auction bridging loans

Auction bridging loans are designed for borrowers who need immediate access to funds to secure a property at an auction. These loans offer quick approval processes and fast access to financing, allowing borrowers to make competitive bids and secure the property without delay. Auction bridging loans are generally short-term, providing borrowers with enough time to secure long-term financing or sell an existing property.

Accessing bridging loans in Australia

Understanding the different types of bridging finance available may assist you to make informed decisions and navigate the property market with confidence, ensuring a smooth transition during the buying and selling process. As a leading Australian private funding broker, Diverse Finance Solutions are extensively experienced in providing bridging loan solutions to Aussie business owners.

With over 200 of Australia’s top private lenders at our fingertips, DFS are well positioned to assist you in sourcing appropriate lenders offering bridging finance. Talk to us today to find out how we can help!

What is equity bridge financing?

Equity bridge financing, also known as equity bridge loans or bridge equity, is a type of short-term financing used to provide immediate capital to a company or individual for a specific purpose. Unlike traditional loans, equity bridge financing may have an equity component. The provider of the financing (often a private equity firm, investment bank, or other financial institution) may receive equity ownership in the company as part of the deal. This can be in the form of convertible preferred shares, common shares, or warrants.

What is the interest rate on a bridging loan?

The final interest rate on your bridge loan won’t be certain until you’ve got a loan offer. This is because the rate is impacted by your application, the terms of the loan and market conditions at the time you apply.

Did you know: Diverse Lending Solutions has some of the competitive rates in the private lending market?

 

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