How Bridging Finance Loans Work
A bridging loan can come in handy when you need to quickly "bridge the gap" and come up with finance to buy a property or land.
Bridging finance can be exceptionally convenient for auction property deals.
In fact, it can be a game-changer.
This is because bridging loans are significantly different from standard bank loans.
But how so?
For one, applications for a bridge loan are usually quick, taking anywhere between 5-14 days to complete.
Bridging finance can be acquired for almost any land or property. It can be used for a number of reasons including:
- Renovations on a property
- Purchasing property that is under market value
- Preventing repossession
-Property investment e.g. buy-to-let
HOW DOES IT WORK?
Bridging loans are offered for a period of anywhere between 1-18 months with the advance repayable in full once the term ends.
The loans are often based on a "retained interest" premise. This means interest is added onto the total amount of the loan, rather than it being added onto the monthly repayments.
If you are worried about the continuous income of your business, this can be beneficial.
There is the option of paying interest on a monthly basis also. However, this option is best suited if you have a property that provides you with a monthly income.
Perhaps the most enticing factor is that most bridging lenders offer 100% of the funding you require. But, in order for that to happen, additional land or property need to be in place as a form of security.
THINGS TO CONSIDER
If you are thinking about obtaining bridging finance, there are some key factors you need to consider first.
EXTRA FEES
With bridging loans, it can be easy to quickly accumulate some extra fees. Therefore, you should be prepared for the fact that you will have you will incur valuation, broker and legal fees.
HIGH-INTEREST RATES
Bridging finance gives you the ability to secure short-term funding in order to purchase a property quickly.
With this, interest fees are relatively high and start at 0.5% per month on average.
DO YOU HAVE A VIABLE REPAYMENT PLAN?
When taking out any type of loan, there is always a danger than you may be unable to make the repayments.
This is especially true when taken out a bridging loan because you have to repay the loan in full once the term has ended.
Also, the loans are short-term, therefore, if you have problems with your repayments you may end up facing some very big issues.
Because of this, you should always plan how the loan will be repaid in advance and ensure you have a viable exit.
For example, if you have plans to eventually sell your property, it is wise that you ensure the term of the loan allows you time to find a buyer and finalise the sale.
PROVIDE EVIDENCE OF EXIT
Most briding finance lenders will require you to provide "evidence of exit." This can be either from a potential sale or, from mortgage lenders if you are planning to get refinancing for a longer-term loan.
