Rush on bridging finance

23 November 2015

Slow down in house sale times stimulates rush on bridging finance

A sense of urgency over Auckland property prices that have continued to rise on one hand, and a slow down in the time it takes to sell an existing house on the other, has caused a sharp escalation in bridging finance applications recently.

Major New Zealand non-bank lender Southern Cross Financial reports that three out of five applications are now for open bridge finance, compared to one in twenty just three months ago.

Southern Cross Financial CEO, Luke Jackson, said that people want to secure their new property before they’ve sold their existing asset, but mainstream banks were shutting the door on open bridge finance (which is characterised by a no fixed pay-off date because the existing property has not been sold).

“The Reserve Banks’ LVR (Loan to Value Ratio) restrictions and the Responsible Lending Code have made banks reluctant to assist home owners when they can’t confirm their exit on the existing property. When you suddenly own two properties – even in transition – your equity is reduced because, technically the second property is classed as a rental and that means you need a lot more equity to comply with the LVR restrictions (70 per cent on rentals in Auckland and 80 per cent for own homes).

“The problem for people is that it’s still a hotly priced market. People still need to go to auction as cash buyers to get the property they want, so we anticipate that demand for bridging finance is only going to increase as the time it takes to sell properties also increases.”

Mr Jackson said mortgage advisors are approaching Southern Cross Financial to approve an open bridge loan – as a short term stepping stone – to give the client time to sell their existing property.

“People, largely on the advice of mortgage advisors, are thinking strategically and that’s a good thing – ‘no’ is never ‘no’ when there are short-term alternatives. To secure a property they really want, many people feel they have to go unconditional, and they’re using short-term open bridge mortgage financing to overcome the timing issues.”

He said every person’s situation is different and he urged people to take professional, independent mortgage advice in the current market conditions.

“We believe that planning your exit strategy is extremely important. If you must open bridge your finance, make it short term. Once your existing property sells, the end debt is reduced and a mainstream bank should be more than happy to take on the new mortgage.

“We have also seen some riskier behaviour from people who are holding on to their existing home for as long as possible after they’ve secured a new property, with the hope of realising more value from a rising market by holding out for the highest price they can get. That is not something we would encourage.

“If a person has gotten themselves into a position of committing to owning two properties and the bank won't help – which we’re seeing a lot of at the moment – the important thing is not to panic. Do your research and seek professional advice because there are options open to you. It’s a very emotional and volatile time, and that’s why it is a good idea to consult with professionals and a specialist lender,” he said.

For more information visit http://scfl.co.nz or contact your mortgage advisor

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