Bridging loans are short-term financial solutions which are typically found in real estate, though they are also used in a variety of other sectors. As the name implies, bridging loans are used to bridge the gap between a debt coming due and the main line of credit becoming available; a common use is to purchase a property before a mortgage can be put in place.
Bridging finance is a highly flexible and adaptable form of finance that’s suitable for many different borrowers, but it’s important to understand what is and isn’t suitable for before proceeding with an application. This article will outline the basic principle of bridging finance and some of the common ways in which it’s used. Anyone considering taking out a bridging loan must ensure that they fully understand the terms and conditions associated with the loan, and should consult their lender or broker before proceeding.
A bridging loan combines the purchasing power of a mortgage with the flexibility and speed of a personal loan; borrowers are able to access large sums of money without waiting for weeks for funds to become available. Because of this flexibility, bridging loans may be used to secure an asset quickly, which is often a high priority in property development. In fact, many bridging lenders boast lending times of less than a week, with decisions in principle sometimes available on the day of application. Once the asset has been secured, a long-term financial solution (such as a mortgage) can then be put in place, and the bridging loan repaid.
This can be a powerful tool because it enables buyers to circumvent the tight restrictions and slow pace of mortgage lenders. For instance, a property developer might have the opportunity to purchase a building at a bargain price - it’s currently in need of repairs, but they have the skills and expertise to refurbish it. Unfortunately, they don’t have the cash to purchase the property outright and must borrow to cover the cost. Because the property is unmortgageable (as it’s uninhabitable), the deal is sunk: however, the developer is able to take out a bridging loan instead. This will cover the cost of purchasing the property and of restoring it to a mortgageable condition; once this is complete, a mortgage will be arranged and the bridging loan repaid. In this way, bridging finance can enable developers to take advantage of opportunities they otherwise wouldn’t be able to, which keeps the real estate sector fluid and flexible.
The flexibility and speed of a bridging loan comes at a higher price than a mortgage, and interest is typically charged monthly rather than annually. This means that a bridging loan can be extremely expensive if not handled properly, as a 1.5% monthly interest fee adds up to a whopping 18% over the course of 12 months. Because of this, most bridging loans are kept as short as possible, and borrowers make sure they have a secure exit strategy in place.
A bridging lender will usually take pains to stress-test their borrower’s exit strategies, ensuring that when the time comes they will be able to repay the loan. In many cases, an exit strategy consists of the sale of the property, but most lenders will work with their clients to establish a viable repayment strategy.
Because bridging loans are secured against the borrower’s assets, the bridging lender will be able to reclaim any lost payments through the sale of the debtor’s security. Depending on the lender, this can be a first or second charge against the property itself, on the borrower’s own house, or on other assets (some commercial lenders will allow businesses to use assets like machinery and vehicles as security.
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