Bridging The Gap: How Bridging Loans Can Help With Short-term Finance Needs

A bridging loan can help you with your short-term finance needs. It aims to bridge the gap between your current financial situation to the new situation you desire. It is one flexible and convenient type of loan.

You can use bridging loans for several financial needs that you will learn as you read on.

Where Can You Use a Bridging Loan?

You can get a bridging loan as a temporary fund whilst you are waiting for an expected inflow of cash. That is why bridging loans only have a short term, typically from 6 up to 12 months.

To show how a bridging loan can work for a variety of examples, let us identify three things for each one:

Situation - why you need an immediate fund

Purpose - where you are going to use the bridging loan

Cash Inflow - expected revenue to be used to pay for the bridge loan

Buying Before Selling Home

The best and the most known example of a bridging loan is on selling and buying a home.

Situation - You are eyeing to buy a new home and to be able to do that, you need to sell your current home first. However, due to a competitive market, you will need to buy the new home immediately. The problem is that you still have not sold your current home, therefore, you don't have the money to put into your new home.

Purpose - You can use a bridging loan to finance the new home whilst your current home is not yet sold.

Cash Inflow - Selling your current home will generate you the money to pay for your bridging loan.

Property Renovations or Repairs

Situation - You are planning to sell your home or other property. However, before you can sell the property, you need to do some renovations or repairs done on some of its parts to make it look more sellable.

Purpose - A bridging loan can be used to pay for your property renovations and repairs.

Cash Inflow - You will get your money once you have sold your new and improved property,

Business Purposes

Situation - You have a business that you want to expand or improve in order to generate more revenue.

Purpose - You can get a bridging loan to use for your business expansion, such as purchase of new equipment, expansion of the premises and buying a new business.

Cash Inflow - Your new equipment or expanded business will increase efficiency and quality that will help you to generate more income from your business.

Auction Purchases

Situation - You are eyeing a property in a property auction and you know that the property will sell fast. However, your bank is too slow to grant you a mortgage.

Purpose - A bridging loan can be your way to be the new owner of that property in the auction.

Cash Inflow - Once your bank has granted you the home loan, you can use the money to pay for your bridging loan instead.

Debt Consolidation

Situation - You have multiple loans and debts with different interest rates, loan terms and repayment process.

Purpose - You can use a bridging loan to pay off your multiple loans, consolidating them into only one loan— your bridging loan.

Cash Inflow - For this example, there is no specific inflow of cash but the payment is already guaranteed. The money you used to use to pay several loans with high interests, it is more possible that you can pay this one loan with low interest.

How Does a Bridging Loan Work?

The best example to understand how bridging loans works is by using them for buying before selling properties.

By availing bridging loans from a reliable lender, you will be given the amount you need for the new property or other purposes, given that you have an existing property for sale.

The amount that you can borrow through a bridging loan highly depends on your property equity. Often, lenders require a minimum of 20% to 50% equity for their borrowers. Higher equity means a higher chance to receive 100% of the purchase price of your new property or other purposes.

Interests are added to your bridging loan every month that you have not sold your existing property. Once your property is sold, you can use the payment you received to pay your bridging loan.

What Are the Requirements of a Bridging Loan?

A bridging loan in Australia requires minimal documents and eligibility requirements. Below is the list of things you will need to secure before getting a bridging loan:

Home equity. Generally speaking, the more loan equity you have, the higher amount you can borrow.

Current property documents. You will need proof that you currently own a property that you want to sell or renovate or a business that you want to finance.

End debt. Most lenders require borrowers to have an end debt. However, when there is no end debt (i.e. a new home costs much less than the old home), lenders tend to increase the loan interest. Some lenders, on the other hand, set the minimum and maximum required end debt.

Sale contract. Some lenders require a copy of a sale contract for your property on sale before the approval of your bridging loan.

Proof of income and your identification.

How to Repay a Bridging Loan?

You have two options for repaying your bridging loan. What you choose depends on the lender–borrower agreement.

The first option is regularly repaying the monthly interest whilst you are still waiting to incur revenue. In that way, you will have less to pay when the term ends.

The second repayment option is to have a specific date of payment down to its interest.

Should You Get a Bridging Loan?

A bridging loan is definitely for you if you have the understanding on how it works, you are eligible, you have all the requirements and you are going to use the funds as stated in the above examples.

Before you decide on getting a bridging loan, you have to fully understand what it is and how it works. Once you do, you need to make sure that you are eligible and you can fulfill its criteria and requirements. Lastly, you need to specify what is the purpose of your loan and how you are going to repay it.

Key Takeaway

Bridging loans can help you with your short-term financial needs whilst you are expecting your inflow of cash. Its convenient process, flexible uses and fast funding transaction make it an ideal solution for your immediate but temporary needs.