Bridging finance made easy

By Letitia Watson
14 November 2017
PHOTO: Getty/Gallo Images

PHOTO: Getty/Gallo Images

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.

THINGS TO LOOK OUT FOR

The fees and interest charged by financing companies are only subject to the National Credit Act if they’re registered as credit providers with the National Credit Regulator. When bridging financiers award an advance, referred to as a discounting agreement, it’s not classified as a credit agreement. It doesn’t mean you get a discount, but rather that their fees and interest could be higher than prescribed by law.

By how much exactly depends on the particular financier. Ask for all fees, interest and levies to be explained before you sign for the loan, and make sure you know what the total cost to you will be. By choosing a financier registered with the NCR, you’re assured of protection by the law.

WHEN IS IT USEFUL?

Bridging finance could be a great help, provided you can pay the loan back quickly. It’s usually used as a deposit on a new property, for transfer duties, removal expenses or outstanding municipal tariffs and rates.

To apply for bridging finance you’d need:

  • ID document
  • Proof of address, such as  a municipal account
  • Proof of income
  • Three months’ bank statements
  • Documents related to the mortgage bonds, such as a valuation certificate and the signed offer to buy a property
  • You must be able to prove the conditions of sale on your property have been complied with – the buyer’s finances must be in place, and all documents must be signed by the owner and buyer. Financiers may set further conditions to ensure that you pay back the money. 

HOW DAILY INTEREST IS CALCULATED

R80 000  your bridging finance

0,1%  daily interest (that’s about 3% a month)

R80 – the daily amount you’ll pay in interest

R2 400  interest after 30 days

  GET HELP HERE

  • The National Credit Regulator: 0860-627-627 or ncr.org.za
  • Some financiers are registered with the Bridging Finance Association of South Africa. For more informaton or to lodge complaints go to bfasa.org.za.


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