In the world of finance, there are numerous options available to help individuals and businesses manage their financial needs. One such option is bridging finance (a short term home loan), a short-term loan designed to bridge the gap between the sale of one asset and the purchase of another.

What Is Bridging Finance?

Bridging finance, often referred to as a “bridge loan,” is a short-term financial solution that helps cover the interval between two transactions. It is most commonly used in property transactions when a homeowner wants to purchase a new property before selling their existing one. This type of finance is especially useful for home buyers who are buying and selling properties at the same time, as it helps manage the timing and financial challenges involved in coordinating both transactions.

How Does a Bridging Loan Work?

Bridging loans provide quick access to funds, allowing borrowers to act swiftly on opportunities without waiting for long-term finance.

Here’s a step-by-step look at how bridging finance typically works:

Application Process: To get started, you’ll need to submit a loan application for bridging finance with a lender. This process involves providing details about your financial situation, the property involved, and how you plan to repay the loan. Approval is subject to the lender’s lending criteria, which may include checks on your equity and other requirements.

Valuation: The lender will assess the value of the property or asset being used as security for the loan. In some cases, a registered valuer may be required to provide an independent assessment of the property’s value. This is crucial because the loan amount is usually based on a percentage of the property’s value.

Approval and Terms: Once approved, you’ll receive the terms of the loan, including the interest rate, repayment schedule, and any associated fees. The type of bridging finance offered may depend on whether a purchase agreement is in place for the new property. Bridging loans generally have higher interest rates compared to traditional mortgages due to their short-term nature and increased risk.

Loan Disbursement: After accepting the terms, the funds are disbursed, allowing you to proceed with your purchase or manage your financial needs.

Repayment: Bridging loans are typically repaid once the sale of the existing property is completed or when long-term financing is secured.

Types of Bridging Finance

There are two main types of bridging finance: 

Open Bridging Loan

• No fixed repayment date
• Suited to borrowers who are still looking for an exit strategy (e.g., they haven’t sold their current home yet)
• More flexible but typically comes with higher interest rates

Closed Bridging Loan

• Has a set repayment date
• Best for those who already have a confirmed sale or an approved long-term mortgage
• Often preferred by lenders, so rates and fees can be lower

Choosing between an open or closed bridging loan depends on your situation, including how certain you are about when you’ll be able to repay the loan.

Why Use Bridging Finance?

Flexibility and Speed

Bridging finance offers a unique combination of flexibility and speed, making it an attractive option for many borrowers. With bridging finance, buyers can make an unconditional offer on a new property, increasing their chances in a competitive market by demonstrating commitment and acting quickly. Whether you’re trying to secure a new home or expand your business, the ability to access funds quickly can be a significant advantage.

Avoiding Missed Opportunities Due to Settlement Dates

In a competitive market, opportunities can arise suddenly, and having immediate access to funds can mean the difference between securing a deal and missing out. Many lenders offer bridging finance specifically to help buyers avoid missing out on desirable properties.

Managing Cash Flow

For businesses, bridging finance can be a vital tool for managing cash flow during periods of transition. Bridging finance acts as temporary finance, providing short-term funding to cover cash flow gaps when settlement dates or transactions do not align. Whether you’re waiting on payment from clients or need to purchase new equipment, a bridging loan can help maintain liquidity.

Bridging Finance in New Zealand

In New Zealand, bridging finance is a popular choice for both residential and commercial purposes. The local market offers various options, with competitive rates and terms tailored to meet the diverse needs of borrowers. Consulting a mortgage adviser can help borrowers find the most suitable bridging finance options in New Zealand.

Bridging Finance NZ Rates and Interest Only Payments

Interest rates for bridging finance in New Zealand can vary widely depending on the lender, the property’s value, and the borrower’s financial situation. Bridging finance may be offered at a floating rate, which can cause monthly payments to fluctuate during the loan term. Rates are typically higher than standard mortgage rates due to the short-term nature of the loan and the associated risk.

The overall bridging loan cost includes not only interest rates but also fees and other charges. Some bridging loans are structured with interest only terms during the bridging period, meaning borrowers pay only the interest until the loan is repaid in full.

It’s essential to compare rates and terms from multiple lenders to find the best deal for your specific needs.

Using a Bridging Calculator

A bridging calculator can be a valuable tool for anyone considering bridging finance. It helps estimate the potential costs involved, including interest rates and fees, allowing you to make an informed decision. 

Additionally, a bridging calculator can show you how much equity you need to qualify for a bridging loan, as different lenders have varying equity requirements depending on the loan terms.

Is Bridging Finance Right for You?

Bridging loans can be a powerful tool for both homebuyers and property investors but only if used carefully and with a clear strategy. If you’re confident about your ability to repay (through a sale or refinancing) and need access to short-term funds quickly, bridging finance could be a smart solution.

However, due to the costs and risks involved, it’s not suitable for everyone. It’s crucial to get professional advice and ensure you fully understand the terms before proceeding.

Conclusion

Bridging finance offers a valuable solution for those needing short-term funding to navigate the gap between the sale and purchase of assets.

With its unique combination of speed and flexibility, it can be an essential tool for both individuals and businesses.

In New Zealand, bridging finance is a popular choice, with various options available to suit different needs. By understanding how bridging finance works and carefully considering the associated costs and risks, borrowers can make informed decisions that align with their financial goals.