What is bridging finance

Bridging finance can help you out when you need money but the timing isn’t right. Bridging loans can help you out when traditional loans aren’t fast enough. For example, if you need money right away for a time-sensitive business opportunity or if you’re buying a new home before selling your current one, bridging loans can help.

More and more property investors, homebuyers, and businesses that need quick access to cash are using this short-term lending option. Unlike conventional loans that can take weeks or months to process, bridging finance can be arranged in days, making it an attractive option for urgent financial situations. 

Before you think about getting bridging finance, you need to know how it works, how much it costs, what its benefits are, and what its risks are. This complete guide will teach you everything you need to know about bridging loans so you can decide if this type of loan is right for you.

How Bridging Finance Works and What It Is

Bridging finance is a short-term loan that helps you get the money you need right away while you look for a longer-term way to pay for things. Most of the time, these loans are paid back in six to twelve months, but they can last anywhere from one month to two years.

The idea is simple: you borrow money against something you already own, like a house, to buy something new or pay for something right away. You pay back the bridging loan when your situation changes, like when you sell a house or get permanent financing.

How Bridging Loans Work

Bridging loans are not the same as regular mortgages. Lenders focus primarily on the value and marketability of the security property rather than your income or credit history. This way of lending based on assets lets loans get approved faster and have more flexible requirements.

Most bridging loans are interest-only, which means you only pay the interest on the loan during the loan term and pay back the principal at the end. Some lenders offer “rolled-up” interest options, which means that the interest is added to the loan balance and paid off when the loan is paid off.

When and why people use bridging loans

Buying and Selling Property

Bridging finance when buying a house is one of the most common applications. A bridging loan can help you buy your dream home if you haven’t sold your current one yet. This stops you from missing out on the perfect property because of time limits.

Property investors often use bridging finance to:

• Purchase properties at auction where immediate settlement is required 
• Buy properties that are in trouble and can’t get loans from regular lenders.
• Pay for renovations before getting a regular mortgage to refinance.
• Get properties in competitive markets where cash offers are better.

Applications for Business

Companies use bridging finance for a number of reasons:

• Quickly buying commercial property
• Giving money for urgent equipment purchases
• Keeping track of cash flow when the seasons change
• Paying for unexpected costs while waiting for payments on invoices

Projects for Development

Property developers often rely on bridging finance to: 

• Buy land for development
• Fund construction projects before securing permanent development finance 
• Bridge gaps between development phases 

Bridging Finance Example: Real-Life Situations

For example, Sarah has a house worth $800,000 and an unpaid mortgage of $300,000. She finds a perfect investment property priced at $600,000 but needs to act quickly. Sarah gets a $600,000 bridging loan against her current property instead of waiting months to sell it.

She buys the investment property right away and then has six months to either

• Sell her first home and use the money to pay off the bridging loan.
• Use a standard mortgage package to refinance both homes.
• If things change, sell the property you just bought.

This example shows how bridging finance lets you act quickly and flexibly when opportunities come up.

Pros and Cons of Bridging Finance 

Advantages

Speed of Approval: It only takes a few days to get a bridging loan approved and funded, while it can take weeks or months for traditional financing. This speed is crucial when purchasing at auction or competing in hot property markets. 

Flexible Lending Criteria: Lenders look at the value of the assets instead of checking the borrower’s income. This makes bridging finance available to people who might not be able to get a regular loan.

Buying at auction: Many properties sold at auction need to be paid for right away, so buyers who don’t have cash on hand need bridging finance.

No Monthly Repayments: With interest-only or rolled-up options, borrowers can manage cash flow more effectively during the loan term. 

Competitive Advantage: Sellers may find cash-equivalent offers through bridging finance more appealing than conditional offers

Drawbacks

High Interest Rates: Bridging finance interest rates are usually 2–5% higher than regular mortgage rates because they are riskier and only last for a short time.

Extra Costs: Arrangement fees, valuation fees, and legal fees can all add a lot to the total cost.

Time Pressure: Most bridging loans have set terms, which means that you have to finish your exit strategies by the end of those terms.

Risk of Property Value Changes: If property values go down while the loan is being paid back, borrowers may not have enough money to pay it back.

Less Regulation: Bridging finance doesn’t have as many protections for consumers as regular mortgages do.

Costs: Fees and Interest Rates

Rates of Interest

The interest rate on bridging finance depends on a number of things, including:

• Risk assessment: Scenarios with a higher risk get higher rates
• Loan-to-value ratio: A lower LVR usually means better rates.
• Loan term: Monthly rates may be a little higher for shorter terms.
• Profile of the borrower: Experienced property investors may be able to get better rates.

The average monthly interest rate on a bridging loan is between 0.75% and 2%, which is about 9% to 24% per year. These rates are significantly higher than traditional mortgage rates due to the speed, flexibility, and risk involved. 

Extra Costs

Arrangement Fees: This is usually 1–2% of the loan amount and covers the lender’s setup costs and risk assessment.

Valuation Fees: You need a professional to value your property, which usually costs between $300 and $800.

Legal Fees: The costs of both the borrower and the lender’s lawyers, which can range from $1,000 to $3,000 depending on how complicated the case is.

Exit Fees: Some lenders charge fees if you pay off your loan early.

Eligibility Requirements and How to Apply

Who Gives Bridge Loans

Some companies that offer bridge loans are:

• Specialist bridging finance lenders 
• Private lending companies
• Some traditional banks (but not as many)
• Lenders based on assets
• High-net-worth individual lenders 

Eligibility Requirements

Adequate Security: The primary requirement is sufficient property equity to secure the loan. Most lenders want at least 25% to 30% equity in the property that is being used as security.

Clear Exit Strategy: Is important because lenders need to know how you’ll pay back the loan. Some common ways to get out are:

• Sale of existing property 
• Refinancing to get back to traditional finance
• Business cash flow or other income sources

Property Suitability: The security property must be easy to sell, which usually means that it is residential or commercial property in a good area.

How to Apply

1. First Meeting: Talk to a bridging finance expert about what you need.
2. Property Valuation: Getting a professional to value your security property
3. Documentation: Include information about the property, the exit strategy, and the finances
4. Credit Assessment: A quick look that focuses on asset security instead of income
5. Approval: Usually within 24 to 48 hours for simple applications
6. Settlement: Money will be available within days of getting the go-ahead.

Bridging Loans Compared to Other Ways to Get Money

Regular Mortgages

Traditional mortgages have lower interest rates, but they also have to:

• A lot of checking of income
• Approval takes longer (4 to 8 weeks)
• Strict rules for borrowers and properties
• Set repayment plans

Bridging finance trades higher costs for speed and flexibility. 

Loans for People

Personal loans are a quick way to get money, but

• Have lower limits on how much you can borrow
• Require proof of income
• Usually have higher interest rates than bridging loans for big amounts
• Don’t use your property as collateral.

Lines of Credit for Businesses

Business credit facilities offer ongoing access to funds but: 

• Need to have a steady income from a business
• Set limits on how much you can borrow based on how well your business is doing.
• May not provide sufficient funds for property purchases 
• Require regular reports on finances

Release of Equity

You can get money from equity release on your current property, but:

• Takes longer to arrange than bridging finance 
• might not have enough money for purchases that need to be made quickly
• Needs to refinance current agreements

Case Studies from Real Life

Case Study 1: Breaking the Property Chain

David had sold his family home and needed to buy a new one quickly to avoid having to pay for temporary housing. He had already promised to buy a new property, but the settlement on his sale was delayed by four weeks.

David was able to finish his purchase on time thanks to a $750,000 bridging loan. The loan for four weeks cost about $6,000 in interest and fees, which is a lot less than the costs and trouble of finding a temporary place to stay and the possibility of penalties for late payment.

Case Study 2: Chance to Buy an Investment Property

Maria found an investment property that was 20% below market value, but she had to sign contracts within 48 hours. Her existing properties had sufficient equity, but traditional finance would take too long. 

She got a $450,000 bridging loan in less than 24 hours, bought the property, and made some small changes over the course of three months. After that, the property was refinanced with a regular mortgage at its higher value. This paid off the bridging loan and gave them more money for their next investment.

Case Study 3: Growing a Business

A restaurant chain needed to find a great location, but they had to do it in a week. It would take months for traditional business loans to be approved.

Bridging finance secured by the directors’ homes gave them $800,000 to finish the purchase. They talked about getting permanent commercial financing for more than six months, based on how well the business did in its new location.

What Are the Dangers of a Bridge Loan

Main Risks

Failure of the exit strategy: The biggest risk is not being able to pay back the loan on time. This could happen if:

• Property sales don’t go through or take longer than planned
• Refinancing is not approved
• Business cash flows don’t happen as expected

Interest Rate Risk: If the loan term goes longer than the first one, you may have to pay penalty rates.

Property Market Risk: If property values go down, there may not be enough security to cover the loan amount.

Financial Stress: High interest rates can make it hard to pay your bills, especially if you have a long loan term.

Risk Mitigation Strategies 

Multiple Exit Strategies: Don’t put all your eggs in one basket when it comes to repayment. Make sure you have backup plans, such as:

• Different ways to sell
• Different ways to refinance
• Other ways to make money

Conservative Valuations: Use conservative property values when calculating borrowing capacity, leaving buffer for market fluctuations. 

Professional Advice: Get help from brokers and advisors who know a lot about bridging finance markets.

Regular Reviews: Keep an eye on how your exit strategy is going and make changes to your plans if things change.

The Future of Bridging Finance and Market Trends

More and more people are accepting

As property markets become more competitive and traditional lending becomes more strict, bridging finance is becoming more popular. Banks are becoming more careful about lending, which opens up opportunities for other types of lenders.

Bringing technology together

Digital platforms are making the application process easier, which speeds up decisions and makes the experience better for borrowers. Online bridging loan calculators help people who want to borrow money understand the costs before they apply.

Product Innovation

Lenders are making their products more advanced, such as:

• Bridging options for a longer time
• Products with lower rates for prime borrowers
• Flexible ways to pay back
• Working with regular mortgage products

The rules that govern things

More government oversight is making products safer for consumers while still allowing for changes. This trend should keep going, giving borrowers more protection without limiting how they can use the money.

Growing the Market

Bridging finance is growing beyond real estate deals to include:

• Buying businesses
• Financing for equipment
• Solutions for working capital
• Transactions between countries

Making the Right Choice for Your Situation 

When used correctly, bridging finance can be a great way to get money, but it’s not right for everyone. Think about bridging loans when:

• You have a clear and realistic plan for how to get out.
• Waiting costs more than the higher costs of financing.
• You have adequate property equity to secure the loan 
• You can handle the higher interest rates without worrying about money.
• You can’t get traditional financing in the time frame you need it.

Don’t use bridging finance if:

• You don’t know how you’ll pay back the loan.
• The costs would be hard on the wallet.
• Traditional finance is available in a reasonable amount of time.
• You’re borrowing more than you can afford

Your Next Steps in Bridging Finance

Bridging finance is a great way to get money quickly, but it only works if you plan ahead and get help from a professional. These loans are faster and more flexible than traditional ones, which can open up opportunities that traditional loans can’t.

Make sure you have the following before moving forward with any bridging finance deal:

• A clear picture of all the costs involved
• Several realistic ways to get out
• Enough insurance coverage
• Advice from professionals who have been there before

The secret to getting good bridging finance is to think of it as a strategic tool instead of a last resort. If you use it wisely, it can give you the financial flexibility you need to take advantage of opportunities and deal with tough timing situations.

Are you ready to find out if bridging finance is the right choice for you? Business Kiwi’s experienced staff can give you personalized advice that fits your needs. Our experts know the bridging finance market inside and out, and they can help you come up with a plan that lowers your risk and raises your chances. Call us today to talk about what you need and find out how bridging finance could help you get your next chance.