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What are Bridging Loans?

Southern Cross Partners loans are mostly short-term, bridging  loans, but what does that mean? There are two types of bridging  loans: Open and Closed. An open bridge is needed when someone wants to buy another property without having sold their current property first. The name makes a lot of sense when you understand that an open bridge loan essentially “bridges” the space of time between buying the new property and selling the current property.

Banks usually only offer a type of bridging finance called a closed bridge , which is a loan that covers a shorter and more defined time period, for example if someone has sold their house but they need a loan to cover the time between settlement and the new house purchase.

Banks typically prefer not to do open bridge loans because one of the key factors they consider is the borrowers affordability, and most people can’t service a huge loan across two properties indefinitely – so they offer close bridge loans because they know there’s a set date that the previous house will sell.

But what if someone hasn't sold their current property, or maybe they haven’t even put it on the market yet?
This is where open bridge loans come in.

The Benefits of Open Bridge Loans

Open bridge loans can assist investors and developers to have some space between purchasing a new property while the current property is sold. In some situations, it might take a few months to obtain the Code of Compliance  or have pre-sales are in place for example, so open bridge loans are a short term solution to allow for one project to finish whilst jumping on the next opportunity.

An open bridge loan must still have an exit date, (generally we prefer between 6 - 24months) so the borrower should have an exit strategy in place which could include a refinance to another lender or the sale of one of the security properties to repay the loan.

The Risks of Open Bridge Loans

There can of course be some risks associated with open bridging finance:

  • What if they don't sell property for what they wanted to?
    • Obtaining a registered valuation or other method of confirming the value and monitoring the overall LVR (Loan to Value Ratio) should ensure that we’re lending the right amount on the property value.
  • What would happen if the property market tanks?
    • Again the LVR plays a big part here so ensuring the lending against the property is within an acceptable LVR for the type of property, region etc,  this risk should be mitigate somewhat.

How does Southern Cross Partners do Open Bridge Loans?

All of our loans are designed to get people from A to B, and are mostly for investors who see a great opportunity, but need that time to obtain the necessary consents to develop  due to advantages zoning, or jump quickly on an investment opportunity.

The key to a good bridging loan is to ensure the exit strategy has been thoroughly investigated and supported. Once we provide a loan we need to ensure there is a clear path to repayment. Some of the items we gather to support the loan application and back up the exit strategy can include;

  • Valuations based on the day one value and the expected completed value of any development
  • Fixed price building contracts to ensure the price of the works quoted is sufficient to complete the project
  • Real Estate Market appraisals to confirm the value of the purchase if a valuation is not obtained
  • Resource Consents
  • Building Consents
  • Sales & Purchase contract - this can show if it is a private sale, or purchased at auction and adds weigh to the true market value of the property

There are many more factors when considering a loan application and each one is analyzed on its individual merits by our experienced credit team.

To find out more about open bridge loans, or to talk to one of our team, get in touch today.