When is the right time for a bridging loan... and when isn't?
As a bridging loan is a form of short-term financing, it is ideal for property investors. That's because it gives them an immediate flow of capital, which can be extremely useful.
For example, an investor might get a bridging loan in order to buy a piece of property, which is being offered at an extremely good price, with the intention of getting a loan with better terms later. Bridging loans are also used to make up various other temporary funding shortfalls.
However, while there are many instances when a bridging loan will bring great benefits to investors, the converse is true. Bridging can prove to be very expensive and cost you dearly.
So when is the right time to take out a bridging loan and when should you avoid bridging at all costs?
The answer to that boils down to the all-important ‘exit strategy’. The prospective borrower needs to be sure (or as sure as they can be!) that the exit strategy is viable and achievable within the suggested timeframe.
The costs associated with having to extend or re-new a bridging loan can be quite severe, with default interest rates often double the standard rate. In addition, the lender might not want to extend the bridging loan if the proposed exit strategy has not come to fruition and any ‘Plan B’ has also withered away.
If it’s a speculative property purchase and re-sale is the exit strategy, there needs to be sufficient headroom in the equity, otherwise any profit can be quickly eroded if the sale doesn’t happen in a timely period. A back-up refinance option should be organised as a Plan B, to allow some breathing space if the sale isn’t forthcoming, and the bridging loan cannot be paid off in the agreed period.
Whatever the case specifics, any borrower needs to be very confident on the exit strategy, and if that isn’t the case, it should be questioned as to whether the bridging option is the right one.
Below are key areas to consider when sourcing bridging finance:
· Interest rates: Interest rates will vary and are determined by a number of factors including property type, location, loan to value required, client profile & credit history.
· Fees: Watch out for fees as these can vary greatly. The interest rate is often less important than the fees, particularly if you only expect to have the loan in place for a couple of months. Standard fees include an arrangement fee, legal fees and valuation fees. Also watch out for any upfront fees and exit fees – most bridging loan companies and brokers don't impose them, but some do.
· Choosing the right bridging company: There are many lenders in this market and some are not specialists in the field. It really is a specialist area, so needs an understanding and specialist approach to underwriting. Look at the track record of the bridging company and how long they have been established. It is also important to know how they are funded – is the lender relying on an institution to provide their funds, or are they self-funded?
· The term of the loan: It can be from one day to a year or more, depending on the provider. A typical bridge loan term would be six months.
Positive Bridging Finance has an unrivalled panel of bridging finance providers, consisting of institutional lenders, private banks and private individuals. Our sources are extremely competitive and reliable and cover England, Scotland, Wales and Northern Ireland.
John Waddiker is director of Positive Bridging Finance. For further information please visit Positivebridgingfinance.co.uk or call 0161 763 0321.
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