There are lots of different products out there in the financial arena for providing loans for many purposes. Whether you are looking to raise capital for a renovation or property development, a new shop fitting, housing restoration project or other getting a bridging loan can be a very good lifeline to getting your project completed.
Bridging loans are specialist finance tools used to provide short-term loans (typically above £25,000) for a short period of time (between 1 to 12 months) nominally. The traditional use of “bridging loans” is to ‘bridge’ the gap in finances that occurs when properties are being purchased and sold within a chain but completion dates can’t be arranged for the same day.
The important factors or key selling points for bridging loans are that they are:
Quick to arrange
This makes them making them ideal when funds are required to snap up a particular bargain. Although one of the best cheap options for borrowing large sums of money (that is only required for a short period of time) other options for raising large sums may have a low monthly or annual rate of interest making them ideal for long-term financing, but when set up costs and early repayment charges are taken into consideration, they may be a very expensive short-term option. Bridging loans tend to have lower set up costs and higher monthly rates of interest as a rule.
Bridging loans consistently are considerably more flexible with regards to credit history, proof of income and credit arrears as they are based on the assets you place the loan upon in the first place.
Important considerations before taking out a bridging loan are as follows:-
Exit strategies
Since bridging loans are not intended to be used as long-term methods of finance, it is very important to have a reliable exit strategy in place before you take out the loan so you can repay any bridging loan at, or before, the end of its term. This is because bridging loans usually have a high monthly rate of interest making them expensive if used for anything other than short-term finance. In addition, many bridging lenders will charge additional fees, such as renewal fees, if you go over the agreed bridging loan term as a penalty for late payment.
You should only base your loan on what you feel you can pay back and on the time frame you consider is a sure bet whether it is for 1 – 12 months or the turnaround time you are working with on the given project. If you are working on turning around a property development project then you must have a clear and concise idea of how long the re-fit (in this case) will take to complete as well as the fact you will need to sell the property in the allotted time frame to pay back the loan.
Can you meet the criteria?
You will have to decide whether or not you can meet these criteria and have all of your calculations in place making sure this is an achievable goal. Like any business opportunity there are risks and with a bridging loan, your property is at risk if you cannot meet the deadlines and requirements of the terms and conditions of the loan in the first place.
Some of the benefits of bridging finance are the fact monies for a project can be obtained quickly to turn around a particular project and realise your return in the very short term. Mortgages are an option of course but they most likely involve long drawn out paperwork and regulatory hoops to jump through all of the ways. A more sensible option in the short term is to secure your property so you can use it as collateral on the loan to renovate the property and sell it in time to repay the loan back to your lender. Another option is to purchase on a buy to let basis which will generate the financial returns to repay the sum loaned but you will have to take into account all of the refurbishment costs, bills, any local council costs and or other power bills in the bargain. All of these things should be accounted for and considered before taking out the loan.
Loans can be secured in as little as two weeks this way so this is perhaps the fastest way to acquire the funds you need in the short term.
If you are considering buying at an auction then it is vital you have the funding in place before you buy and if you purchase a property it is normal that you have to pay for the property within 10 days as a rule of thumb. There is also a normal fee while processing the purchase of approximately 10% surcharge. In some cases, you may be able to get a payment plan of up to 28 days but this is not the “norm” so to speak.
It is however important you have checked the property you wish to purchase well before you place any bid and have your solicitor go thru the legal pack and check for any special provisions in place upon the purchase. Having the property well surveyed before you commit to purchasing is always a sound move due to the fact there can always be a hidden problem you may have missed so be sure to have all of your bases covered here as well.
