Closed Bridge Loan

A closed bridge loan is a short-term financing option used by borrowers to “bridge” the gap between the purchase of a new property and the sale of an existing one. Unlike an open bridge loan, a closed bridge loan has a fixed repayment date, typically aligned with the known date of an impending sale or a secure financial event that will provide the necessary funds to repay the loan. This type of loan is commonly used in real estate transactions to facilitate the purchase of a new property while awaiting the sale proceeds of an existing property.

Key features of a closed bridge loan

Fixed repayment date

A closed bridge loan comes with a predetermined repayment date, which is usually tied to a specific event, such as the sale of the borrower’s existing property. This feature provides certainty to both the lender and the borrower regarding the loan’s repayment timeline.

Short-term nature

Closed bridge loans are designed to be short-term solutions, typically ranging from a few weeks to a few months. They are not intended for long-term financing but rather to cover a temporary shortfall.

Higher interest rates

Due to the short-term nature and higher risk associated with bridge loans, they often come with higher interest rates compared to traditional mortgage loans. Borrowers should be prepared for these elevated costs as part of the overall financing strategy.

Security

Bridge loans are generally secured by the borrower’s existing property, the new property being purchased, or both. This collateral provides the lender with security in case the borrower defaults on the loan.

Flexibility

Closed bridge loans offer flexibility for borrowers in terms of financing options and repayment structures. They can be tailored to meet the specific needs and timelines of the borrower.

Advantages of a closed bridge loan

Facilitates timely property purchases

Closed bridge loans enable borrowers to purchase a new property without waiting for the sale of their existing property. This can be particularly beneficial in competitive real estate markets where timing is crucial.

Provides financial certainty

With a fixed repayment date, borrowers and lenders have a clear understanding of when the loan will be repaid. This certainty can help with financial planning and management.

Quick approval and disbursement

Bridge loans are typically processed faster than traditional mortgage loans, providing borrowers with quick access to funds when they need them most.

Maintains property ownership

By securing a closed bridge loan, borrowers can avoid the need to sell their existing property at a potentially unfavourable time or price, allowing them to wait for a more opportune moment.

Disadvantages of a closed bridge loan

Higher costs

The higher interest rates and fees associated with closed bridge loans can significantly increase the overall cost of borrowing. Borrowers should carefully consider these expenses when evaluating their financing options.

Risk of property sale delays

If the sale of the existing property is delayed or falls through, the borrower may face difficulties repaying the bridge loan on time. This can lead to additional costs or penalties.

Collateral requirements

Closed bridge loans are secured by the borrower’s property, which means that if the borrower defaults, they risk losing their collateral. This adds a layer of risk to the transaction.

Short-term nature

The short-term nature of closed bridge loans means that borrowers must have a clear plan for repayment. Without a well-defined exit strategy, they may face financial challenges when the loan comes due.

Example of a closed bridge loan in action

Consider a homeowner in Sydney who wants to purchase a new property for $1,200,000 while their existing home is listed for sale at $800,000. The homeowner expects the sale of their current property to close in three months. To bridge the gap, they secure a closed bridge loan for $800,000, with a fixed repayment date aligned with the expected sale date of their existing home.

• New property purchase price: $1,200,000
• Sale price of existing property: $800,000
• Closed bridge loan amount: $800,000
• Repayment date: Three months from loan issuance, coinciding with the expected sale date of the existing property

The homeowner uses the bridge loan to complete the purchase of the new property. Once the existing property sells, the homeowner repays the bridge loan with the sale proceeds.

Conclusion

Closed bridge loans provide a valuable financial tool for borrowers looking to purchase a new property while awaiting the sale of an existing one. With a fixed repayment date, these loans offer financial certainty and flexibility, enabling timely real estate transactions. However, borrowers must be mindful of the higher costs, potential risks, and the need for a well-defined repayment strategy. By carefully evaluating their financial situation and planning accordingly, borrowers can effectively use closed bridge loans to achieve their property goals.

For more detailed information on bridge loans and other financing options, you can visit the Australian Securities and Investments Commission (ASIC) website.