Subject Identified - Bridging Finance
Subject Identified - Bridging Finance
It is also known as “caveat loan”, “interim financing”, “gap financing” or “swing loan”.
Bridge finance is a short-term loan, usually from financial institution, that “bridges” the period between the closing of a home purchase and the closing of a home sale. Not surprisingly, to qualify for bridging finance, a contract provided by borrower to sell existing house is necessary in most cases.
On the other hand, bridging finance is generally secured by a mortgage, and valuation constraints are required. Normally the Loan-to-value Ratio (LTV or LVR) on new property generally does not exceed 65% for commercial purpose, or 80% for residential purpose, based on appraised value.
Bridging finance should last for a short period, commonly between two weeks to one year, until the arrangement of long-term financing or the remove of obligation. Based on the time frame of payment, there are two types of bridging finance that named “closed bridging” or “open bridging”.
Interest rate and other costs involved in bridging finance
Compensating for the additional risk rising from the loan, it is typically more expensive than conventional bridging finance. It has a higher interest rate, points and other costs that are amortized over a shorter period, various fees and other "sweeteners" (such as equity participation by the lender in some loans). The lender also may require cross-collateralization and a lower LVR. On the upside, they are arranged quickly with relatively little documentation.
On the other hand, bridging finance may offer interest rates less than others, but the loan usually end up being as cumbersome and time-consuming as a bank loan, and will often have similar documentation requirements and LVR.
So, in addition to the interest rate, what will be required to pay? Generally speaking, it includes:
• An establishment fee (1-2% and varies between cases);
• Costs of obtaining an independent valuation on security; and
• Legal fees occurred in preparing loan documentation.
For convenience, most bridging finance providers allow the costs associated with the loan (including the interest) to be deducted from the loan advance. In other words, the bridging lender will effectively ‘roll up’ these costs as part of the loan then the borrower is not actually required to pay these costs until the loan is repaid. Better understanding of bridging finance can be seen in an example, which will be illustrated in the next article, Subject Continued – Bridging Finance.
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