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Funding for property trading is more specialised that getting a loan through a trading bank.
Property traders make their money by buying a property at a price which allows them to make a profit by selling it for a higher price – normally after a relatively short period of time.
Trading banks make their money by holding a loan for (hopefully) a long period of time. The small margin they make between what they can purchase funds for to on-lend to customers makes money for them over time.
Funders for property traders however know that they are only going to have their funds lent out for a short period of time so cannot rely on the interest rate margin to make them a profit. For these reasons they charge an upfront fee and a higher interest rate.
These funders also take more of a risk in that the borrower normally does not have the ability to service the debt. The funders rely on a “take-out” for the deal they are funding – for example, if you can purchase a property with a long settlement – and secure an on-sale of that property – then these types of funders would lend based on the guarantee of getting their money back once the property is sold. If you had a loan offer from a standard trading bank – once certain conditions have been met over the period of alternate funding – then this is also seen as a “take-out” for this type of funder.
Times you would seek “property trade”/alternate funding:
- When purchasing and on-selling a property within a short period of time.
- When purchasing a property that doesn’t fit with a trading bank immediately.
- There are past loan payment or credit issues which need to be sorted out over 6 months to take back to a trading bank.
- You purchase a property cheaply with a good valuation and you want to have the bank rely on the valuation and not the purchase price.
- You are purchasing a non-traditional property which needs modifications before a bank will accept it.
There are good commercial, as well as practical, reasons to use property/alternate funding. This type of funding is often only available through brokers like us who have experience and contacts in this area.