Your money: gen up on bridging finance
Boost your knowledge before taking out these loans
IF YOU’VE bought or sold property before, or plan to do so, there’s a good chance you’ve come across bridging finance. It could come in handy when you need to cover costs for a new house but don’t have the money available immediately. But beware, this kind of financing can also turn out to be expensive! WHAT IT IS IN A NUTSHELL It’s an advance or loan you get on money due to be paid out to you soon. In the past only banks used to offer bridging finance but these days other financing companies also specialise in this area. HOW IT WORKS Say you’re selling your house and buying a new one, but you have to wait for the transfer to be finalised before you get your money from the sale. In the interim you might need money to cover costs like the deposit or transfer fees on the house you’re buying.
Meanwhile the financier lends you the amount needed, provided you can prove you’ll soon be receiving the proceeds from your house sale. The loan is usually made available within 12-48 hours.
As soon as the sale of your current house is finalised and you’ve received the proceeds, you then pay back the bridging finance.
This kind of financing is also available as an advance, for example on your pension or third-party claim payouts. You can take out a loan in anticipation of a third-party claim that’s due to pay out, for example. You may use the loan money as you wish. HOW MUCH ARE YOU ALLOWED? Financiers will advance you a percentage – usually 80% – of the amount against which you’re taking out the bridging finance.
If you’re selling your house for R1 million and your debt and costs on it add up to R800 000, the amount you’ll be paid out is R200000. So if the bridging financier gives you an 80% loan on the R200 000, it will be R160 000. IT COSTS MONEY Like any other loan, this advance isn’t free. You pay fees and interest on it. If your own payout is delayed or the sale of your property falls through, you’ll still have a loan that needs to be paid off.
The fees can be anything from R250 to R1 000, depending on the financier and loan amount. Limits on fees apply only to financiers registered with the National Credit Regulator (NCR) who have to comply with legal prescriptions.
Fees are charged on a weekly or monthly basis for the period of the loan.
Interest rates are high because these loans are regarded as high risk. The interest might appear low, such as 0,1% a day (equal to R1 per R1 000 per day), but it can be quite expensive – see figures box.
The interest applicable must be set out in your loan contract.
Nicola Faurie of Bridge Flow says bridging finance is a competitive market, which means you should request quotations from several companies before you decide who to borrow from.
She says many financiers will adjust their interest or fees if the client can show them a better quotation from a competitor.