Bridging Loan Guide

It is common for many people to have concerns when they hear someone talking about bridge loans and finance as these loans are very misunderstood. Even people who have a background in finance are sometimes concerned when it comes to bridge loans and aren’t sure how they can be beneficial to a borrower. While in the past, these types of loans may have been a little more expensive and came with a number of drawbacks for borrowers, these loans now are powerful enough to allow borrowers to get the money that they need for emergencies or necessary purchases without worrying about negative drawbacks.

What Is Bridging Finance?

While some people like to think that bridge loans are the same as mortgages, they do have a number of similarities but they are very different. Bridge finance is similar to a mortgage in that the amount you can borrow depends on the value of your home, the lender will place a loan on your property, and you have to pay back interest and the full amount at the end of the loan. Bridge loans are, unlike mortgages, much shorter in term and generally have much higher interest rates. They are generally under a year but the rates can top out at higher than 15%.

Bridge loans can help with creative financing since the lender is not as concerned with the borrower’s income or the condition of the property. In addition, these loans are much faster than mortgages and allow borrowers to access their necessary funds within a few days if necessary, as opposed to months. For a lender to be the second charge on the home, there has to be enough value in the home for them to get their money back, and to offset the fear of losing money, they will charge a much higher interest rate.

Bridging Finance Uses

When people hear that bridging finance involves higher interest rates, it can be difficult for them to understand why someone would opt for this kind of loan. If you are going to be flipping a piece of property and need to get money to improve it before you can sell, then a bridge loan is a great way to finance your purchases. In addition, the speed at which you can obtain a bridge loan allows borrowers to access money quickly. This can be important if you are interest in a home for sale at auction as you want to be able to come up with cash in hand to pay for the new home.

One final reason to look into bridge finance instead of a mortgage is if your bank won’t loan against the property because it is not habitable. Property that is in bad condition will be very difficult to get a mortgage for but bridge loans can be taken out and used to get the property in good condition; then it’s easy to apply for a mortgage.

What to Borrow

Knowing how much you can borrow if you are considering bridging loans and finance is important so you can be sure that you get the full amount of money you need to complete your work. While your income or potential rental income isn’t considered in a bridge loan, the value of the property is and is the most important factor. Some companies will lend on the full value of the home instead of the purchase price while others will actually loan on the suspected future value of the home once you have completed all of the work that you are going to do. This gross development value can be much higher than the current value of the home, depending on what kind of work you are willing to put into the property.

The lender will want to complete a valuation so they can be sure that they aren’t over-lending on the property and putting themselves at risk. They will want to know how quickly you plan on paying back the loan, what kind of experience you have doing this sort of work, and if there are any other outside factors that will ensure that you will be able to pay back what you borrow.

Bridging Guide to Fees and the Application Process

Knowing how much money you will have to pay for your loan and the application process is important so you can be prepared. Borrowers need to be prepared to pay for the valuation, any legal fees, the exit fee, and a broker fee if applicable. While these loans aren’t the least expensive option, being able to access money so quickly makes them attractive.

The process of getting a bridge loan is very similar to taking out a mortgage but is generally much faster. You will need proof of insurance, searches for the property, valuation approval, and any other paperwork that the lender needs you to sign. Once all of the paperwork is completed, the lender will be able to begin the loan process.

Things to Consider

When thinking about taking out a bridge loan, it’s smart to consider the pros and cons to make sure it’s a good fit for you. Reading about a bridging finance example online will let you learn if your situation is similar. Make sure that you will earn enough money on your project after paying back all fees and other costs for the loan. Be sure that you have a way to get out of the loan or pay off the balance in case you run into issues with selling the property or refinancing for a lower rate. It’s also smart to think about the reputation of the lender and if you value a lower rate or better terms.

The right bridge loan is a great way to finance work on a new home and to tide you over until you are able to take out a traditional mortgage but only if you understand how they work. Knowledge is power and in the case of bridge loans, can keep you from making an expensive mistake.