Bridging The Gap
Bridging loans have been making a comeback recently, with demand for the product rising as home owners took advantage of record-low interest rates and home buying schemes throughout the pandemic. But even as rates rise and the property market stabilises, demand for this type of loan product isn’t waning. In this feature, partnered by Funding.com.au, we take a look at how bridging loans are bridging the gap for home buyers
The property boom of 2020 and 2021 saw record levels of mortgages being written, as homeowners took advantage of record-low interest rates, attractive cash back offers and government-backed incentives to buy property.
The resulting property-price escalation enticed many existing homeowners to sell; with empty nesters taking the opportunity to downsize from their family homes, while others looked to renovate or upgrade to bigger homes with more space (ideal for working from home during lockdowns).
But as many lenders suffered long blowouts to their turnaround times as demand soared, many borrowers found themselves in a situation where the sale of their property was delayed. But they had already found their next dream home, leaving them in a bind. As such, bridging loans became the hero of the hour.
Bridging loans might not be for every borrower, but when homeowners find themselves in a house-moving crisis, such loans become a valuable financial tool to get them out of trouble.
By ‘filling a gap’, the product can save borrowers time, money, stress and hassle when it comes to sorting out their dilemma.
“Customer need for bridging loans is very strong [and] it hasn’t slowed down,” explains Funding’s chief revenue officer Lee Slattery.
“With market changes, bridging facilities are very much based on [a customer] having one property and getting to the next.
“Whether it’s upsizing or downsizing or just changing, we haven’t seen a drop off [in demand]; if anything, we’ve seen record numbers in applications and settlements.“
Quick times driving bridging loan take-up
Mr Slattery says that the increasing demand for the product has resulted in product innovation and more competition in market, particularly from non-bank lenders.
“Banks have done it… but they primarily do it only for existing customers – or it’s very limited – so the need has always been there, but the product solution hasn’t been very good,” he explains.
According to Mr Slattery, the larger banks only have a limited range of bridging loans, with most only offering bridging loans for 12 months.
The majors can also be fairly slow at turning bridging loans around, taking around 30 days to settle (even though the loan duration itself might just be for a few months), he says.
As such, Funding.com.au says more business has been coming their way as borrowers look to alternative solutions.
“We’ll go up to three years, but our sweet spot is six to 12 months,” he says.
However, the average length of Funding’s bridging loans is about 10 months, and generally under 12 months, Mr Slattery adds.
“We’re also able to turn the loan around in three days… Our tech allows us to do it,” he adds.
“So, we have real product solutions backed by tech, but the balance with us is that we’ve still got real ‘credit people’ on it.
“We’ve got the strong tech being super-fast, but good credit people making good decisions.”
Brokers are also able to accredit quickly, Mr Slattery says, meaning that a broker can accredit and approve a loan in under a day, if not hours.
“We’ll conditionally approve that day and if we get everything we need – with many [situations] driven by customer settlement date – we can move forward in just a few hours,” Mr. Slattery says.
How does it work?
For most, it’s about having the money to move into one home before the existing property sells without needing to take out a new mortgage.
Rather than paying monthly interest, like a mortgage, the bridging loan has ‘capitalised interest’.
According to the company – founded in 2015 by lawyer Jack O’Reilly and on the lender panel of AFG, Vow, Yellow Brick Road and Purple Circle – the capitalised interest is attractive to borrowers, as it’s basically a fixed cost as it doesn’t change like variable loans.
“You’ve paid all your interest in your loan amount so there’s no outlays for the customer,” he explains.
Who is the typical client?
According to Funding’s CRO, the typical bridging loan client is typically “someone who’s more mature, more affluent, and has got one property are buying another”.
He estimates that the lender’s clients typically own property worth around $1.5 million and “tend to take the opportunity [to buy property] when they see it, and they don’t want to slow down”.
“For downsizers – particularly the ones that have maybe overextended and are going a bit smaller – [a bridging loan] is a perfect fit for [them} because they’re ‘bridging’ from a bigger product down to a smaller product, which suits us as well,” Mr. Slattery says.
What does a bridging loan look like?
The non-bank lender currently has three types of bridging product: straight bridging; building and construction; and business.
Mr. Slattery notes that while around half of its flow is for straight bridging products, it has seen a rise in building and construction loans as more construction companies collapse and building times blow out.
“So it’s people in a property that are building another one, but they might need another three to six months to build it [because of delays], so we can help there,” he says.
The loans typically come with an establishment fee/set-up fee, with interest capitalised into the loan.
“There are no ongoing fees and then [the borrower] moves on within the next 12 to 18 months…” the lenders CRO says.
“The good part about this lending is that it’s really not based on servicing the debt long term – it’s an ‘exit strategy’.”
Read the article here, originally published by The Adviser on 16th November 2022 by Fabian Cotter.
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