Bridging finance plays a crucial role in facilitating swift acquisitions and bridging gaps in funding for property market participants. Whether you're a property developer, investor, or homeowner, grasping the nuances of bridging finance can allow you to leverage opportunities and manage financial transitions effectively.
What is Bridging Finance?
Bridging finance is typically a short-term loan used to bridge the gap between when a debt becomes due and when the main line of credit (or an exit) becomes available.
What are some different types of bridging finance?
Closed Bridging Loans
Definition: Closed bridging loans are suitable when the borrower has a
clear and definite repayment plan, often backed by the sale of an
existing property or a confirmed payment from another source.
Usage: They are ideal for borrowers who have exchanged contracts on
a property sale and are awaiting completion. The repayment date is
fixed, making it less risky for lenders. The key here is that there is a
defined exit for the lender.
Open Bridging Finance
Definition: Open bridging finance is more flexible in terms of
repayment. It does not require a definite exit strategy, making it suitable
for borrowers who have not yet finalized the sale of their existing
property or need more time to secure long-term finance.
Usage: It provides a temporary solution to cover shortfalls in funds for
property purchases or projects, offering more flexibility in repayment
terms compared to closed bridging loans.
How Bridging Finance Works
In the residential market, you may have purchased a property with a defined
settlement date, but haven't sold your current home (the proceeds of which will be required for the new purchase). A bridging finance solution steps in to provide the necessary funds to secure the new property. Once your existing property sells, you repay the bridging loan along with any interest accrued during the short-term period.
For Property Developers, you might need to rely on a bridging loan to acquire a development site at short notice. It may be that traditional funding lines are not available to you until you meet certain milestones e.g. a resource consent or pre-sales.
Key Features of Bridging Finance
- Short-Term Loans: Typically, bridging loans are short-term, ranging from a few weeks to a few months, although they can extend up to a year depending on the lender and circumstances.
- Speed and Flexibility: They are designed for speed, allowing borrowers to act quickly in competitive property markets or urgent financial situations.
- Higher Interest Rates: Due to their short-term nature and quick accessibility, bridging loans often carry higher interest rates than traditional mortgages.
Advantages of Bridging Finance
- Quick Access to Funds: Enables swift property purchases or funding
injections into development projects. - Flexible Repayment Options: Offers tailored repayment plans based on
individual financial circumstances. - Opportunity Maximization: Allows investors and developers to capitalize on time-sensitive opportunities in the property market.
Bridging finance serves as a vital tool in the property sector, offering flexibility, speed, and temporary financial relief. Whether you opt for a closed bridging loan with a fixed repayment strategy or an open bridging loan with more flexibility, understanding these options empowers you to make informed decisions aligned with your financial goals and circumstances. Don’t hesitate to reach out to Lateral Partners if you have a specific opportunity you’d like to discuss.
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