A bridging loan is short-term property finance used to cover a timing gap between a current funding need and a future capital event, such as a property sale, refinance or project sell-down.
Bridging loans, put simply, look to bridge a gap between your capital commitments or obligations and expected capital inflows. These scenarios can arise for a multitude of reasons; however, the most common is the timing gap between selling an existing property and settling on a new property that you are acquiring. In this sense, a bridging loan exists to solve a specific problem: cashflow. And in the world of property, accessing capital at the right time can be the difference between securing an opportunity and losing it.
Let’s examine when a bridging loan is a good idea, when it isn’t, and how to decide.
Bridge Loans Recap
A bridging loan is a short-term loan secured against property. It is designed to cover a temporary funding gap, typically while waiting for the proceeds from the sale of an existing asset to become available.
Unlike a standard mortgage, bridging loans are not structured around long-term repayment schedules. They are intended to be repaid quickly, commonly within three to six months, with some facilities structured for longer where justified.
Interest is usually capitalised rather than serviced during the loan term, meaning it accrues and is repaid at the end, along with the principal. This makes bridging finance well-suited to situations where cashflow is constrained during the bridging period.
When Does Bridge Finance Make Sense?
Bridging finance is built for timing gaps and works best where the borrower has a clear and credible exit strategy to repay the debt. In New Zealand, one of the most common scenarios where bridge loans are used is settling on a new property purchase before the sale of an existing property has been completed. Rather than losing the opportunity to make the purchase or selling your existing property under pressure to realise capital, a bridging loan allows the transaction to proceed.
For property developers, bridging finance can be an exceptionally useful tool where capital is tied up in residual stock from a completed or near-completed project. A developer may have created value and built profit into the project, but until the remaining stock is sold or refinanced, that equity is not fully available. Bridging finance can help unlock part of that value and allow the developer to secure the next site or opportunity without waiting for the full sell-down to complete.
This is where bridging finance can support growth. Rather than treating each project as entirely separate, a well-structured bridge can help developers recycle capital from one project into the next. The key is that the lender must be comfortable with the remaining stock, the expected sale timeframe, the borrower’s pricing expectations and the overall exit strategy.
Investors looking to scale their portfolio face a similar dynamic. If the right opportunity appears before existing capital has been freed up, bridging finance can allow them to act without waiting on a sale to settle.
The common denominator between these scenarios is a well-defined exit strategy. The more certain and well-defined the exit strategy is, the more viable the bridging loan becomes.
Open vs Closed Bridging: The Difference in Risk
Not all bridge loans carry the same level of risk, and understanding the difference is an important part of deciding whether bridging finance is a good option for you.
A closed bridge loan is one where a clear exit strategy is already in place. The most common example is where a borrower has an unconditional sale and purchase agreement on their existing property, but the settlement date falls after the date they need to settle on their new purchase. This scenario is called a closed bridge. The binding unconditional sale and purchase agreement sets a defined repayment date for the bridging facility to be repaid.
From the lender’s point of view, closed bridges are lower risk due to the clear path to repayment.
However, even during a closed bridge, there are a variety of considerations for the lender. These include the strength of the purchaser, the purchasing entity, whether an individual or limited liability company, and other general terms of the contract. This includes the price paid, deposit, if any, GST position and other general terms that may weaken or strengthen the weight of the contract.
On the other hand, open bridge finance requires a more careful approach. Here, no binding sale and purchase agreement exists at the time of borrowing. The borrower needs to settle on a new property but has not yet secured a buyer for their existing one. There is no fixed repayment date and no guaranteed income to draw on. This makes an open bridge riskier for both the borrower and the lender, and it requires a more thorough assessment of whether the exit is realistic.
Open bridging still serves as a valid strategy when it is properly structured. In many property scenarios, waiting until an asset is sold can mean missing the next opportunity. The key issue is not whether the bridge is open or closed; it is whether the lender can get comfortable with the security position, sales strategy, market conditions, borrower behaviour and realistic exit timeframe.
Lenders will need to be convinced about your exit strategy, including your sale methodology and timelines. They will need to see value in your product, believe the market will similarly see value at the same level, and see that you are a willing seller with realistic expectations as to market price. A disconnect between vendor sale price expectations and the realities of the market can result in poor client outcomes, as speed is everything in the world of bridging finance.
ASAP Finance provides both open and closed bridging solutions, structured to suit the specific circumstances of each borrower. Closed bridging is generally lower risk because the exit is already contracted. Open bridging carries more uncertainty because the exit has not yet occurred, but it can still be a valid and effective strategy where the security position is strong, the sale strategy is realistic, and the borrower has a clear plan to repay the facility.
Key considerations of Bridging Finance
Bridging finance is a useful tool, but it is not without downsides. Before committing to a bridge loan, it is worth understanding where the risks sit.
Cost
Interest and fees associated with bridging loans are often higher than standard lending, reflecting the short-term nature of the facility and the risk profile involved. Because interest is typically capitalised rather than serviced, it accrues throughout the loan term and is repaid at the end of the loan. If the term extends beyond what was originally anticipated, there will be additional interest and fees, which can compound, and the total cost of bridging finance increases.
Exit dependency
A bridge loan is only as reliable as the exit behind it. If the sale of an existing property takes longer than expected, achieves a lower price than anticipated, or falls through entirely, the borrower can find themselves in a difficult position. This is particularly true of open bridge scenarios, where the exit is not yet secured at the time of borrowing.
Timeline pressure
Bridge loans are short-term by design, typically running between three and six months, or sometimes up to twelve months where appropriate. Borrowers who underestimate how long their exit will take, whether due to a slow market, settlement delays, or other unforeseen circumstances, may find themselves needing to extend the facility, which carries additional cost and is not always straightforward to arrange.
How to Reduce Risk in Bridging Finance
Exit clarity
Before taking on a bridge loan, borrowers should have a realistic and well-considered plan for how and when the facility will be repaid. The stronger and more certain the exit, the more manageable the bridging period becomes. Where possible, having a binding sale and purchase agreement in place before drawing down a bridge loan significantly reduces the uncertainty involved. In other words, opt for a closed bridge where possible.
Realistic timelines
ASAP Finance recommends a minimum loan term of three months, even where borrowers expect to need less time, to allow for unforeseen delays in settling the sale of an existing property. Adding a buffer to your expected repayment timeline will ultimately be less costly than extending the facility under pressure (the same can be true when seeking development and construction funding).
Understand the opportunity cost
One decision we commonly see developers struggle with is whether to accept an offer at a price that is below the forecast or expected sale price. To make this decision, you need to know your product, understand the depth of the market you’re playing in, and know your holding cost. If you’ve marketed your property for three months without any offers, and you receive an offer $30,000 below your asking price, but your holding costs are $30,000 per month, then you need to recognise that if, in one month’s time, you still have no offers, you’ll be $30,000 worse off, with no sale and high holding costs. It is a complicated dynamic, but understanding your sale price and your bottom-line price, and having a strategy in place to execute, are paramount.
Lender experience
Working with a lender who understands the specific dynamics of bridging finance makes a material difference. At ASAP Finance, our lending managers are experienced investors and developers themselves. We assess bridging applications with a practical understanding of how property transactions work, and we structure facilities to suit each borrower’s real timeline and circumstances.
Make an Informed Decision on Bridge Loans with ASAP Finance
Bridging finance is one of many tools available to property developers and can help developers grow and scale their business. But like any tool, it’s only useful if you know how to use it. It’s essential that borrowers have a clear understanding of how to get bridging finance and a critical view of the risks involved. That preparation, combined with a lender who understands the nuances of short-term property finance, gives any bridging facility the best chance of success.
If you are considering bridging finance and want to understand how it could work for your situation, get in touch! To get the ball rolling, all we require is the property details, sale and purchase agreement, funding requirement and details of your exit strategy. The team at ASAP Finance can quickly assess whether bridging finance is suitable and help you evaluate the right structure for your circumstances.