Bridging finance loans or swing loan is a type of financing used to bridge a temporary gap in funding. Bridging loans are short-term, typically arranged for periods up to twelve months, although some types of bridging loans may be extended to eighteen months depending on the lender.
Bridging loans are usually backed by security such as residential property, commercial property, or land.
A bridging loan is to facilitate the purchase of a property before a longer-term funding option becomes available. Bridging loans tend to be more expensive than traditional borrowing forms such as mortgages.
We’ve discussed the features of a bridging loan, your options for getting one, and how to get a fair deal.
Features & benefits of Bridging finance loans
The entire process is fast and straightforward, with no complex requirements. Nonetheless, it is essential to understand all the facts behind bridging finance in Australia before making any decisions.
Below are some main features and benefits of this type of loan:
Flexibility
Bridging finance allows the borrower flexibility in their financial transactions. They can use this type of financing to purchase an asset without losing any equity in their existing property.
Interest offset
The interest on the loan is offset against other expenses such as tax bills, legal fees, and stamp duty. This means that the borrower will only have to pay interest on the amount they borrow rather than spend additional money upfront.
Convenience
Bridging finance can be arranged quickly and easily compared to other loans such as a mortgage or personal loans, where there are often delays due to paperwork etc. When you apply for bridging finance, you need not worry about quickly finding a tenant or selling your existing property. The lender will continue to service your loan from the rental income earned from your property until it is sold.
Provides Immediate Access to Funds
Unlike traditional bank loans, which take months or even years to get approved, bridging loans can be approved in just a few days. These loans don’t require strict income qualifications or credit checks. Lenders usually approve these loans based on the value of the collateral provided by the borrower.
Allows Borrowers to Purchase New Properties Before Selling Existing Ones
Choosing to obtain bridging finance enables borrowers to purchase properties before selling their current homes. They can approve these loans by securing the new properties with their existing homes as collateral. However, most institutions will not provide approval on these loans without detailed information regarding the borrower’s plans for their old homes.
Wealth Package
If you want to invest in property and make profits from it, bridging finance loans can be used. You can take out a loan and invest that money into a property that offers good returns. Once that property is sold for a profit, you can pay off the loan amount. Bridging finance loans is also helpful for people who want to invest in more than one property simultaneously.
Unlimited lump sum payments
Most bridging finance lenders offer total lump-sum payments to their customers. You don’t have to worry about paying off your loan within a specific period or making regular repayments every month. If you want to sell your property, pay off the loan amount, and keep the rest of the money for yourself, you have the option to do that as well.
How does it work?
This loan type is typically taken out by homeowners who want to buy a new home but are still waiting to sell their current home. In other words, this type of loan can bridge the gap between the purchase of a new property and the sale of the existing one, hence its name ‘bridging’ finance. This type of financing is also known as gap cover or swing loan.
Considerations for bridging financing
Maximum term of 12 months, capitalized repayments only, converting to the new loan principal and interest repayments.
An 85 percent LVR is the maximum (can include settlement, application, and legal fees).
Available for the purchase of undeveloped land; however, there are some restrictions.
Construction financing, firm, or Stratum title acquisitions are not eligible.
Standard RAMS lending requirements apply if the borrower wishes to refinance another loan.
During the bridging term, there are no redraws on the bridging loan.
Tips on how to choose a bridging loan
Here are some tips on how to choose a bridging loan in Australia:
Ask About Exit Fees
When you take out a bridging loan, it’s essential to know how much it will cost when you repay it – especially if there is any chance that you might default on your repayments. The exit fees associated with different types of bridging loans can vary greatly, so make sure that you find one that fits your budget and doesn’t have too many fees attached if you don’t make all of your repayments.
Check your lender is registered and licensed.
Check that the lender is registered and licensed with ASIC (Australian Securities and Investments Commission) or ASIC connect. This ensures you have recourse should something go wrong.
Check the interest rates.
Most bridging loans are interest-only, although some lenders will offer principal and interest options. It’s essential to shop around for the best deal for your circumstances. Also, remember that some lenders will offer discounted rates for longer loan terms.
Shop around
Getting a bridging loan is much like getting any other type of loan — it pays to shop around and make sure you’re getting the best deal out there. Many different lenders are offering bridging loans in Australia, so make sure you look at what each has to offer before deciding on a lender.
Ask for references
It’s always good to ask for references when taking out any kind of financial product or service. If your lender isn’t willing to provide references, it may be worth looking elsewhere. A lender who’s happy to give references is usually more confident in delivering quality service and providing an accurate representation of their capabilities.
Don’t look through all the options when it comes to bridging finance loans. Ask us first, and let us shop around for you while you get a free, no obligation quote when it comes time for you to consider your options.
