Debunking The Myths of Bridging Finance
Finance can be a complex system for those who don’t live and breathe it every day, like we do at Intuitive Finance.
Interest Only vs. P+I, LVR’s, LMI’s, Asset Finance, Guarantor loans. There are plenty of acronyms, lingo, and concepts to get your head around. As you can imagine, we at Intuitive Finance are asked all sorts of questions about finance by everyday borrowers.
Some of the most common queries I field are about bridging finance and how it can be utilised to a client’s advantage.
During my time, I’ve encountered many misunderstandings about bridging finance. In this article, I want to explore some, so you can set aside any concerns and move forward confidently to benefit from this loan type.
What is Bridging Finance?
Bridging finance (or bridging loans) simply enables homeowners to buy a new property, before they’ve sold their existing one. Put another way, bridging finance helps create financial flexibility when timing and opportunity don’t naturally align.
With bridging loans, homeowners use the equity in their existing property to purchase their new home and cover other costs, such as legal fees and stamp duty. Using such financing is a savvy way to stay cool and calm amid the stress and worry that often surround buying and selling property. It also allows buyers to take advantage of rising markets by delaying the sale of their current home to ensure they maximise the price.
Borrowers also seek bridging finance for other reasons. Some of the most common is when they’re upgrading or downsizing or to avoid temporary housing or double moves. They might also prefer to use their equity rather than their savings, or to simply provide financial certainty during life transitions.
Common Myths of Bridging Finance
There are several common myths people believe about bridging finance. Here are some of the ones we’ve heard, and what the truth actually is.
“My equity, income and exit strategy aren’t important”
Actually, these points are key factors in bridging finance applications and approvals, particularly as lenders see these loans as high risk. So, ignore these details at your peril.
“Bridging finance is a great long-term debt solution”
No, it’s not. Again, lenders’ wariness of these loans means they’ll typically be offered only as a short-term option, with six to 12 months as the average. You should also remember that not all lenders offer these loans.
“Bridging finance comes with standard interest rates”
No, it doesn’t. In fact, thanks again to lenders’ high-risk expectations, bridging loans are more expensive than an average loan – and the longer the bridging period, the more expensive it is. Interest is also generally capitalised during this time.
“My equity will give me lots of room for negotiation when buying my new house”
Not necessarily. Borrowers may have less negotiation leverage than usual for an upfront deposit, especially if their funds are tied up in property equity.
“Once I have a bridging loan, I can forget about it while looking for a new house”
No, you can’t. Even more than an everyday loan, bridging finance is not ‘set and forget’; it requires regular, active management.
“My existing home will sell for a fantastic price, particularly as we’re in a seller’s market”
Sale price assumptions should always be conservative, not optimistic. Doing this will protect you if your house sells for less than its estimated price, which means you can’t fully repay your bridging loan.
Buying a home is a major financial commitment, and it entails financial risks. While bridging finance can deliver flexibility during a home changeover, it won’t insulate you from every potential risk. With many borrowers not fully understanding how these loans work, gaining clarity early and seeking the right advice is critical.
Professional guidance and pre-application assessment are essential for this type of lending, and a tailored approach is always best. When structured well, these loans can reduce stress, rather than increase it, but they can also be complex and risky for those who don’t fully understand them.
Fortunately, if you’ve got questions or concerns about your financial arrangements, expert advice is on hand. Reach out to Intuitive Finance and discuss your needs with our brokers.
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