Friday, March 23, 2018

What You Need To Know About Bridging Loans

property investments
Bridging loans are actually a relatively simple form of financial instrument.When used correctly, a bridging loan can be a fantastic way of facilitating a property purchase that might otherwise be unavailable to the buyer. Of course, they aren’t right for everyone and there are some alternatives on the market that may be a better option. Bridging finance should be treated as a short-term solution and can be more expensive than a traditional mortgage, but with these costs and risks comes the potential to unleash possibilities that wouldn’t be available with other types of finance.

Bridging loans remain popular with borrowers because of their ability to ‘fill the gap’ between the purchase of a new property and the sale of an existing one, or simply if capital is needed quickly. A classic problem for buyers is that their capital needed for the purchase is locked up in an existing property. A bridging loan is a short-term borrowing facility that provides the borrower with the capital to help complete on their new property, which is then later repaid when the old property is successfully sold.

Bridging loans aren’t just used by traditional buyers. Bridging finance is often used by landlords and property developers looking to buy property at auction, where quick access to finance is needed to secure purchases. These buyers will normally use bridging loans, at a higher rate than a mortgage, to secure quick funds, and then look to re-mortgage the property later. Of course, if a developer is looking to buy a property, renovate and then sell on quickly, bridging finance could be a fantastic option for borrowing that can be easily repaid once the renovated property is sold.

For more ‘standard’ buyers, bridging loans help grant access to deals that would be impossible otherwise due to funds being tied up in their current home. To use an example, let’s say a couple owned a home worth £250,000 with a mortgage of £150,000. They want to move to their new dream home worth £400,000, but the vendor will only sell based on contracts being exchanged within a month and completion within 6 weeks. In this timescale, a sale of their current home is unrealistic, so bridging finance can be used to help fill the gap. The bridging company would lend the couple the funds to purchase the new home, and once their existing property has sold and the mortgage repaid, the equity that remains would be used as a deposit for a mortgage on the new property. Once the mortgage is arranged, this capital would be used to repay the bridging loan.

Of course, the example above does not come without risk. Borrowers need to ensure they are aware of the interest rate they will be paying, and are reliant on their existing property selling at a viable price. If market conditions change the borrowers could be left unable to sell their existing property and with both their existing mortgage and the bridging loan to repay.

For the reasons above, bridging finance should always be treated as a short term borrowing solution. Rates will be higher than a traditional mortgage, so it’s important for the borrower both to keep up with the repayments and refinance onto a lower rate product as soon as the sale of their old property has been completed.

Bridging finance can be secured in a number of ways. Lenders vary in size and style, and in recent years the rise of P2P or crowdfunded lending has also opened up another source of funding for potential borrowers. In all cases, it’s always sensible to look for an accredited source of funding, which in the UK will be in the form of FCA approval. Bridging finance companies are normally adept at working quickly, the product relies upon fast approval and capital being made available to borrowers in short time frames.

In the right situation a bridging loan is a powerful product that can help the borrower secure property that would otherwise be unavailable to them, but they aren’t without their risks or alternatives so it’s important to take a balanced view on their use. A bridging loan can help secure a dream home for a family or a desirable project for a developer, so when used correctly they are a useful option to add to the toolkit of options available to borrowers.

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