Buying and selling property and/or moving home is notable for being one of the most stressful experiences that we put ourselves through. Even under normal circumstances (if there are such things) there’s plenty of mishaps and pitfalls along the way. Enter the realm of less-than-normal circumstances and, well, there can be demons!
Bridging loans and finance may well seem like one of the scarier monsters to be found under the bed, in this case, but they needn’t be a reason to hide behind the sofa until the property buying/selling drama is over.
What is a Bridging Loan?
Bridging loans may not be familiar to everyone but they are fairly simple to understand. They offer short term finance (along with light-speed application and acceptance processes) for the purpose of buying property. Perhaps alarm bells will be ringing at the phrase ‘short-term’. In recent years the payday loan has become well known to many people and is a constantly controversial form of borrowing. This type of short-term loan may well be behind the generally nervous approach we begin to take when we hear the phrase ‘short term’.
In fact, bridging loans have been around far longer than payday loans and have also, in the past at least, been offered by many traditional and trusted lenders. These days, the market is much broader and there are a huge range of bridging loan providers in the financial sector. It’s important to understand, at this stage, that a bridging loan does have one thing in common with other forms of short-term loans – the interest rates on bridging loans are high, much higher than on a longer-term loan or mortgage.
Unlike other short-term loans, however, a bridging loan is secured against your existing assets – usually the property that you are purchasing. In practice this means that whilst the loans themselves may be the more expensive option you should have the collateral to pay them back.
Who Should Use Bridging Loans?
Along with high interest rates, bridging loans are generally characterised by higher than normal arrangement and administration costs. The higher costs and higher interest rates are the pay-off for the ability to access this level of funding at short notice. So, who are bridging loans aimed at and under what circumstances might you wish to consider using this kind of finance?
Most firms will consider any applicant but the product itself is generally aimed at those new to the property development sector – be that first-time developers or amateur ones. People buying at auction are also another group who bridging finance can be of use to, as well as landlords who have a portfolio of properties and are looking to expand their business. Other groups who may find bridging finance useful are those who have inherited property and wish to carry out some renovations or repairs before selling it on or those who are involved in a chain and risk losing a property if they cannot complete before the sale of their own home.
Important Factors to Consider
Bridging loans are often a tempting prospect and are also an extremely useful way of accessing cash to purchase a property swiftly. They can be useful to just about any property purchaser, as well as those mentioned above. However, the costly nature of the loans and the short-term nature of the finance means they are not suitable for everyone. The most important factor to consider when looking into bridging finance is not so much how you will get into it – but how you will get out of it!
Individual circumstances here are the key. The bridging finance will only last for a set period – possibly six or twelve months – and after this the loan must be paid back. The longer the period of the loan, the more interest you will pay and it’s also worth checking the costs of any exit fees or penalties, should you find yourself in a position to pay the bridging loan back before the agreed date.
Plan B Financing
Bridging finance is ideal if you can guarantee that your existing property will be sold in time to pay back the loan – but we live in an uncertain world. Other options to pay back the loan, when it is due, include applying for a mainstream mortgage or, perhaps, a buy-to-let. This would be useful if you haven’t sold your existing property and need to let out either that or your new home. As banks are generally taking longer to process standard or buy-to-let mortgages it’s worth applying for a suitable replacement mortgage as soon as you have bridging finance in place. This will ensure that you are able to pay back the loan should your expected source of finance not become available in the anticipated time frame.
Finding a Provider
In recent years the number of bridging loan providers has grown significantly. Finding the right provider for your circumstances is essential and also can be something of a headache, if you are not familiar with this specialist field. Take appropriate advice from a specialist advisor or broker and always use providers that are fully regulated. Whilst they are not for everybody, bridging loans can provide exactly the solution you may need in a very rapid time-frame and ensure that your plans can be realised.
For tailored advice on how your business could benefit from a bridging loan, give us a call on 03333 059 513.
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