When it comes to financing property investments, there is a veritable toolbox of unique financial instruments that are best used in rather specific scenarios.
One of the most interesting examples of this is the bridging loan, which is designed to enable the quicker purchase of a property, either for the purpose of house flipping or whilst a more favourable mortgage is set up.
There is a wide range of people who talk to a bridging loan broker about this particular type of loan, including people who want to buy a new home whilst in the process of selling their old one, people who buy properties at auctions or property investors who are selling in the short term regardless.
Because of their relative expense compared to conventional finance or mortgages, higher interest rates and shorter terms, they are best used for specific use cases and are less suitable for others.
With that in mind, here are the best and worst times to get a bridging loan.
Best: When Buying A Property At Auction
Commonly, the best times to get a bridging loan are when you want to close a sale as soon as possible to make the most profit, at which point the higher interest rates are less of a concern.
Unlike a mortgage or a large business loan, which can take over a month to close, bridging loans can be completed in a matter of days, with some taking as little as 48 hours in exceptional circumstances.
If the increased interest rates do not offset the amount you are set to gain from either a quick turnaround sale or lucrative rent payments, opting for a faster, more expensive option can be ideal.
Best: When You Have A Known Source Of Finance Incoming
There are industry sectors where a bridging loan is commonly used to get a project off the ground whilst a long term source of income is agreed to, often taking the form of issuing shares or a long term investor.
This is commonly used in the mining sector as a means of securing the funding for a new mine but is also used in other sectors where the expected profit will outweigh the loan amount, such as high-level football clubs.
Worst: When You Want A Long Term Financing Option
Bridging loans are short term projects that need to be repaid within a year with little room for renegotiation, and naturally whilst they can often be obtained easier than other long-term forms of finance, they are not the right option.
A real-life example of why can be seen with the YouTube content creators Austin and Catherine McBroom, known as the ACE Family, who bought two expensive mansions to merge together using a pair of bridging loans totalling over $9m only for the house to enter foreclosure once the highly successful creators hit financial troubles due to a series of major legal cases.
Worst: If You Cannot Afford Two Mortgages
If you plan to buy a property to sell immediately, do have a backup plan in case it takes longer than expected to sell the property. Discuss your circumstances with your financial broker and they will find the right solution for you.