Selling your current home while buying another can sometimes create a timing problem that many homeowners don’t anticipate.
You may have successfully sold your property and know that you’ll receive money from the sale, but those funds aren’t normally available immediately. In South Africa, the seller generally receives the net proceeds only once the property has been registered in the buyer’s name and the financial settlement has been completed.
Meanwhile, your next property purchase may already require money for a deposit, transfer costs or other expenses.
The result is a temporary cash flow gap. You have money coming, but you can’t access it yet.
This is where bridging finance may be considered.
Bridging finance can provide short-term access to a portion of money expected from a property transaction before transfer has been completed. However, it comes at a cost and isn’t automatically the right solution for every seller.
Understanding how it works, what it costs and where the risks lie is important before deciding whether bridging finance should form part of your next move.
What Is Bridging Finance?
Bridging finance is short-term funding designed to cover a temporary financial gap.
In a property transaction, it may allow a seller to access part of the proceeds expected from a confirmed property sale before those proceeds become available following registration.
This is different from a home loan.
A home loan provides long-term finance for the property you’re purchasing. Bridging finance is generally intended to provide temporary liquidity while you’re waiting for money already tied up in another transaction.
The advance is typically repaid from the proceeds of the property sale once transfer has registered.
Because bridging finance is short term, the way it is priced can also differ considerably from an ordinary home loan. Sellers should therefore understand the full cost before accepting an advance.
Practical Example
Imagine you sell your current home for R2,000,000. After settling your outstanding bond and selling costs, you expect to receive approximately R600,000 from the sale.
You’ve already found your next home, but you need R150,000 towards the deposit and purchasing costs before the transfer of your current property has registered.
The problem is that your R600,000 is still tied up in the property transfer.
Bridging finance may allow you to access a portion of those expected proceeds early. If approved, you could receive the R150,000 you need before registration and use it towards your next property purchase.
Once your existing home registers and the sale proceeds become available, the bridging finance provider is repaid the R150,000 plus the agreed interest and fees. The remaining proceeds are then paid to you, subject to the other costs and obligations of the transaction.
In simple terms, bridging finance isn’t giving you additional equity. It’s allowing you to access some of the money you’re already expecting from your property sale before it becomes available.
This example is illustrative only. The amount available, costs, approval requirements and repayment terms depend on the bridging finance provider and the individual property transaction.
Why Does a Cash Flow Gap Happen?
Property transactions don’t happen instantly.
After an Offer to Purchase has been accepted and any suspensive conditions have been fulfilled, conveyancers still need to complete the legal transfer process.
This can include obtaining bond cancellation figures, arranging guarantees, securing municipal clearance figures and certificates, completing transfer duty requirements, preparing documents and eventually lodging the transaction at the Deeds Office.
Only once registration takes place does ownership legally transfer to the buyer and the financial settlement of the transaction take place.
For someone who is only selling, waiting for those proceeds may simply be part of the process.
It becomes more complicated when you’re simultaneously purchasing another property.
You might need access to money for your next transaction before the proceeds from your existing home become available.
How Does Bridging Finance Work When Selling a Property?
Consider a homeowner who sells a property and expects to receive a substantial amount after settling the outstanding bond and other selling costs.
That expected amount is the seller’s net proceeds.
If the sale has progressed sufficiently and meets a bridging finance provider’s requirements, the seller may be able to apply for an advance against part of those expected proceeds.
The provider assesses the transaction, the amount expected to be available after registration and the risks involved.
If approved, an agreed amount is advanced before transfer.
When the property eventually registers, the bridging finance amount, together with the applicable interest and fees, is generally settled from the sale proceeds.
The seller then receives the remaining balance.
The exact structure, qualifying requirements and amount available vary between providers, so sellers should never assume they can access all of their expected equity.
What Can Bridging Finance Be Used For?
The reason for taking bridging finance will depend on the seller’s circumstances.
Someone purchasing another property may need short-term access to funds for costs associated with the next transaction.
Buying a property can involve expenses beyond the purchase price, including transfer costs, transfer duty where applicable and bond registration costs. Some of these expenses need to be paid before the new property can register.
Other sellers may need funds for expenses associated with relocating or preparing for their next property.
The important question isn’t simply whether bridging finance is available.
It’s whether accessing your future proceeds early justifies the cost.
How Much Bridging Finance Can You Get?
There isn’t one percentage that applies to every property transaction.
The amount a provider is prepared to advance will depend on factors including the expected net proceeds, the stage of the transfer, existing obligations against the property and the provider’s lending criteria.
This is why sellers should be cautious of assuming that a particular percentage of their property’s selling price will automatically be available.
Your selling price and your available proceeds are two different figures.
For example, money may still need to be allocated towards:
- Settling an outstanding home loan.
- Estate agent commission.
- Bond cancellation costs where applicable.
- Compliance requirements.
- Other amounts connected to the transaction.
The starting point should therefore be understanding what you’re likely to receive after these obligations have been taken into account.
What Does Bridging Finance Cost?
This is one of the most important questions to ask.
Bridging finance is designed for short-term access to money, and the cost can be considerably higher than conventional home loan finance.
Depending on the provider, charges may include interest, administration fees or other costs associated with arranging the advance.
Older examples of South African bridging products have quoted relatively high monthly rates, which demonstrates why sellers shouldn’t compare bridging finance directly with the annual interest rate on a home loan.
More importantly, rates and lending terms vary between providers and can change over time.
Before accepting bridging finance, ask for a clear written breakdown showing:
- The amount you’ll receive.
- The interest charged.
- Any administration or initiation fees.
- How the cost is calculated.
- The estimated amount you’ll repay.
- What happens if transfer takes longer than expected.
Don’t focus only on the amount being advanced. Look at how much of your eventual sale proceeds will remain after the facility has been settled.
What Happens If Property Transfer Is Delayed?
This is one of the biggest risks associated with bridging finance.
A property transaction can take weeks to move from an accepted Offer to Purchase to registration, and delays can occur.
Missing documentation, bond-related requirements, municipal clearances and compliance issues are among the factors that can affect transfer timelines.
If the cost of your bridging finance increases according to how long the money remains outstanding, a delay may increase the amount you eventually repay.
This is why bridging finance should generally be approached as short-term funding rather than money that can comfortably remain outstanding for an uncertain period.
Before proceeding, ask the provider exactly what happens financially if registration takes longer than originally anticipated.
What Are the Risks of Bridging Finance?
The biggest risk is cost.
Accessing money early can solve an immediate cash flow problem, but you’re effectively paying for the convenience of receiving part of your sale proceeds before registration.
There’s also the risk of borrowing more than you actually need.
If you’re expecting a substantial amount from your property sale, an advance can feel like accessing money that already belongs to you. But every rand borrowed reduces the amount you’ll eventually receive from the transaction once the finance costs have been deducted.
Another consideration is the underlying property transaction itself.
Property transfers can encounter delays and, in some circumstances, transactions can fail because of financing problems, contractual disputes or other conditions.
The terms governing what happens in these circumstances need to be understood before signing any bridging finance agreement.
When Can Bridging Finance Make Sense?
Bridging finance may be useful when the need for money is genuinely temporary and there’s a reasonably clear source of repayment from an existing property transaction.
For example, you may have already sold your current home and be purchasing another, but the timing of the two transactions means you need access to some of your expected proceeds sooner.
In circumstances like these, bridging finance can provide flexibility.
However, convenience alone doesn’t necessarily make it financially worthwhile.
The decision should consider the amount required, the expected transfer timeline, the total cost of borrowing and whether another solution is available.
When Should You Avoid Bridging Finance?
Bridging finance may be less appropriate when the transfer timeline is particularly uncertain or when you don’t have enough remaining equity to comfortably absorb the borrowing costs.
It may also be unnecessary if you have sufficient savings available to cover the temporary shortfall.
Most importantly, bridging finance shouldn’t be used to make an unaffordable property purchase appear affordable.
If purchasing your next home depends on stretching your finances beyond what you can realistically manage, the bigger issue may be affordability rather than timing.
Short-term finance can solve a timing problem. It doesn’t solve a long-term affordability problem.
How Can Sellers Reduce the Need for Bridging Finance?
Good planning can sometimes reduce or eliminate the need for short-term borrowing.
If you’re selling and buying simultaneously, start by understanding the financial position of both transactions.
Before making an offer on your next property, establish:
- Expected selling price
- Less outstanding home loan
- Less selling costs
- Equals estimated net proceeds
Then consider:
- Deposit on the next property
- Transfer and bond costs
- New home loan required
- Moving and other immediate expenses
This gives you a much clearer picture of how much money you’re expecting from your sale and when you’ll need funds for the next purchase.
Your Offer to Purchase can also play an important role. Property sale agreements can contain conditions requiring a buyer to sell an existing property before the new transaction proceeds.
The appropriate structure depends on the transaction, which is why coordinating your property sale, purchase and finance from the beginning can be valuable.
Why Home Loan Pre-Approval Matters When You’re Buying Again
If your next property will be financed with a home loan, understanding your borrowing capacity should happen before you commit to the purchase.
Selling your existing property doesn’t automatically mean you’ll qualify for the home loan required for your next one.
Your income, expenses, existing debt, credit profile and the size of the new home loan will still form part of the bank’s assessment.
A home loan pre-approval can help establish your likely affordability before you make an offer.
At LEAP Home Loans, we assist buyers with free home loan pre-approvals and can submit qualifying applications to multiple participating banks, allowing buyers to compare lending options rather than relying on a single application.
Plan the Sale and Purchase Together
When you’re moving from one property to another, it’s easy to think of the sale and purchase as two separate transactions.
Financially, they’re often closely connected.
At LEAP Real Estate, we believe the timing of a property sale can be just as important as achieving the right selling price.
Before listing your current home, it helps to understand what it may realistically sell for, how much you still owe on the property, the costs associated with selling and approximately what you may have available for your next purchase.
From there, you can consider your new home loan requirements and whether the expected timing creates a genuine cash flow gap.
That gives you the opportunity to plan before you’re under pressure to find money quickly.
Final Thoughts
Bridging finance can be a useful tool when selling and buying property at the same time, but it should be used for the right reason.
Its purpose is to bridge a temporary cash flow gap between money you’re expecting from a property sale and expenses that need to be paid before those proceeds become available.
The convenience comes at a cost.
Before accepting bridging finance, understand exactly how much you’re borrowing, what it will cost, how it will be repaid and what happens if your property transfer is delayed.
Most importantly, plan your sale and next purchase together.
If you’re thinking about selling your home in Gqeberha and purchasing another property, LEAP Real Estate can help you understand your property’s position in the market and prepare for the next stage of your property journey.
And if you’ll require a home loan for your next purchase, LEAP Home Loans can help you start with a free home loan pre-approval and compare options from multiple participating banks.
Disclaimer: This article provides general information only and does not constitute financial, credit or legal advice. Bridging finance products, eligibility requirements, interest rates and fees vary between providers. Before entering into a bridging finance agreement, obtain the provider’s current terms and consider independent professional advice where appropriate.
