13 Aug How to best use bridging finance – Andrew Mirams
Just the mention of bridging finance can strike fear into the hearts of some people but Andrew Mirams has some ways to make sure you use it wisely.
Kevin: We quite often talk about bridging finance, but I wonder how many people realize what’s involved, what are the pitfalls, and really, is it all that expensive? Let’s get a bit of an insight into this. Joining me now is Andrew Mirams from Intuitive Finance.
Andrew, welcome to the show once again. Thanks for your time.
Andrew: My pleasure, Kevin. How are you?
Kevin: Well, thank you, my friend. Is bridging finance expensive? Walk me through some of the more practical uses of bridging finance.
Andrew: It’s a great question, because the first thing people often say is “Oh, I don’t want to do bridging finance because I’ve heard that’s too expensive.” It is and it isn’t. It’s a funny thing to say.
If you think about what bridging finance is, firstly, generally it’s when someone bought a property before they’ve sold a property. Often, people want to do it when they just want to make one shift. They go out, they commit, they buy something at the auction on the weekend, 30 days later, they own that property, but now they have to exit their old property.
Often, they’re upgrading. etc. That would be the most common use of bridging; very rarely on a downgrade because you should have enough money. But if there is a transition period, that’s the bridging component. So, it’s the bridging portion or the time in between a buy and a sale.
So, when you say, “Is it expensive?” primarily, it’s just because you’re basically carrying two mortgages. That’s the expensive portion, because you have the new mortgage that you’ve taken on for the new property plus you still have to fund or look after your existing mortgage until that sells. So, that’s probably where the main thing around the expense comes in – that you’re really carrying two mortgages, Kevin.
Kevin: To describe it, its name really says what it is, doesn’t it? It’s a bridge between the old loan and the new loan. Is that right?
Andrew: Absolutely. And when you say expensive, it’s a short-term loan so the banks don’t actively compete for it because they’re looking for the end debt; that’s what they’re most interested in. There’s a whole range of ways the banks assess it. Will they assess on the peak debt – the total exposure – or the end debt, and is there a contract now in place for the sale or not, and how much time?
There are a whole lot of variations that go in it, but the expense part, generally you’re talking about a variable interest rate in and around the fours. So, it’s not that expensive from natural interest rate. The expense is really just covering the two mortgages.
Kevin: Yes, it really depends how long that takes. I guess you should be factoring in anywhere from two to three – maybe even four – months of carrying the bridging loan.
Andrew: Yes. If you walked down the street to get the paper and you came back with a different bit of paper being a contract for sale because you bought something while you were out, you’re probably not ready to sell your house. But then at the same time, most people who probably are entering a bridging loan and doing that were doing a little bit of preliminary work in advance, because the reality is that they’re trying to get the house that they’re in now ready for sale and in a position that they can sell it quickly because they don’t want to carry those two mortgages in the long term.
Kevin: Yes. We’ve quite often given the advice – haven’t we – that it’s best to sell before you buy so you don’t find yourself in that situation. But practically speaking, that’s not always possible, and you sometimes end up sacrificing the true value of the property that you currently own just to move to the new one.
Andrew: Absolutely. We’ve talked about how to negotiate, modern negotiation tools, and having all those sorts of things in place. Well, all of a sudden if you hand the power over by being in a position where you’ve sold and now you have to buy something, you have to make that settlement, it takes you out of the position of power and it means that you might be a little bit more at the whim of a selling agent or a vendor in that instance.
Kevin: When it comes down to thinking about how expensive it may or may not be, it’s really just a matter of factoring in the cost of the bridging loan as part of that move. It’s part of the cost of doing it.
Andrew: Absolutely. Yes, that’s right. And like everything, Kevin, a little bit of planning and a bit of preparation, and just having your ducks in a row before you launch into these sorts of things, you can generally cover it off. And the smaller the bridge, the smaller the time gap, the less expensive it’ll be for you.
Kevin: Always good talking to you. Andrew Mirams making a lot of sense from Intuitive Finance. And don’t forget Andrew’s channel, of course, on RET full of lots of great information and new videos we’re putting up there as well all the time.
Andrew, thanks for your time.
Andrew: My pleasure, Kevin. Thank you