Finding the right bridging finance solutions at the right time can save you from a difficult financial situation and give you financial peace of mind. Bridging loans are the short-term interest-only loan that can be used to raise immediate funds to buy a residential or commercial property or renovate existing property for mortgaging purpose before a permanent finance solution is available. In other words, it bridges the gap between short-term cash requirements until long-term finance is arranged.
Bridging loans can be arranged for anywhere between a few weeks and a couple of years. However, they are mostly used for six to twelve months. Bridging loans require you to put your property as security and come with significant interest rates. This fast-emerging and highly competitive finance industry offers distinct benefits as well as risks. Often borrowers misunderstand bridging finance and find themselves in a challenging financial position. Therefore, it is essential to understand the pros and cons of bridging finance before you apply.
The Pros of Bridging Finance
#1 Fast way to raise funds
The time taken to process the application, getting approval and receiving funds in your account is usually much lesser compared to a traditional mortgage. As a homeowner, you can obtain this short-term loan to buy your dream home or buy a property at auction until your existing home is sold.
As a business owner, you can get access to the fund to pay for inventory, purchase new equipment or meet payroll. Thanks to this expedited process, you can use bridging finance to expand your business and close new deals faster, giving you a competitive edge.
#2 Used for a range of purposes
Most traditional loan providers are very strict about how you are going to use the funds. Conventional mortgages usually apply to habitable property, such as homes, commercial properties or holiday homes. They are very particular regarding the intended purpose while authorising the loan application.
On the other hand, you can get bridging finance solutions for a range of property investments, such as residential sites, refurbishment work, land deals, or even constructing a property from the ground up. It can be used for practically any purpose whatsoever as long as you prove that you can pay back the loan at the determined time.
#3 No proof of income or good credit score required
When you apply for traditional loans, you are supposed to present a number of documents, including your credit score, proof of income and solid security to back your loan. Bridging loans, however, are non-status loan. That means their focus is solely placed on the potential profitability from the development deals. Hence, bridging finance can be secured against any asset of sufficient value, such as home or commercial property.
Even if your current financial position is not good or you have a bad credit rating and don’t have an income proof, you can still qualify for the bridging loan. In fact, none of these things matter if you put up the necessary collateral and show proper exit strategy.
#4 Flexible repayment terms
With bridging finance, you can either make monthly repayments or pay the entire amount with interest at the end of the term. Bridging finance usually doesn’t ask you to make monthly repayments at least for a few months after the funds are credited in your account. Most lenders will not be concerned about monthly repayments, if you assure them to repay the money right away.
But, if you wish to make monthly payments, some lenders offer monthly interest-only repayment as well. That means you have to pay only the interest every month until your term ends. Then, you pay off the capital amount as soon as a permanent finance solution is obtained.
The Cons of Bridging Finance
#1 High interest rates
Bridging loans usually have high transaction and interest fees. Unlike a traditional mortgage that only charge 5% interest annually, most bridging loan lenders charge 13 to 19% interest annually. Since bridging finance is meant for short-term, borrowers are not paying interest for as long as they would pay if they take out traditional loan. Therefore, to make up for this, lenders charge high interest rate.
This high interest rate can be risky if you fail to repay the loan as planned. But, with a concrete plan to repay the loan in a few months, a bridging loan can be, in fact, more affordable than other mortgages. You won’t be faced with excessive or monthly interest if you plan thoroughly.
#2 Bridging loans have LTV limit
When you decide to take the bridging loan to buy a new property, you need to know that you are limited to 80% Loan to Value of your existing property. That means if your property’s worth is £100,000, then the maximum money you can get through bridging finance is £80,000.
This is not an issue when your home’s worth is £300,000, but the situation is different for a home worth £50,000. Meaning, home buyers cannot get enough bridging loan if the value of their property is not high enough.
#3 Currently unregulated
Presently, commercial bridging loans are unregulated in the UK. That means borrowers are not protected under the Financial Conduct Authority (FCA) when they take out a bridging loan to secure buy-to-let investment or commercial property.
However, its unregulated nature makes easy to get a bridging loan as lenders are not bound by any regulations or rules governing such services.
#4 Several other fees
Besides monthly interest, bridging loans can come with several other fees, including brokerage fees, arrangement fees, evaluation fees and even legal fees. Hence, it is advisable that you take bridging loan quote to understand the applicable fees before you apply for the bridging loan.
Remember these 4 things before you go for bridging finance
- Evaluate your property’s worth and be practical about how much you can sell it for.
- Figure out how long will it take to sell your property.
- It is suggested that you make some monthly interest repayments in order to reduce the overall debt.
- Have another plan ready in case things don’t work out as you planned.
The process of acquiring a bridging loan may look simple, but getting it is not easy. Understanding when and how you wish to use the money taken out as bridging loan is as important as knowing the details of the finance itself. Before you choose to go for bridging finance, consider the pros and the cons, and evaluate your needs carefully.