When you think about financing for building or property maintenance you may well be filled with dread, because seriously other than accountants who like to deal with all the difficult paperwork and running around to find the best deal that you can.
Bridging Finance and What Is It?
- Typically it is a short term loan.
- Typically from 2 to 12 months per application.
- Includes the option to longer-term finance or a more suitable exit strategy later.
- Normally used in property purchases/ acquisitions.
- Loans are typical to be repaid when security is sold or re-financed through the lender.
- Bridging loans are non-standard loans due to both their terms and unusual conditions.
- They are not only used for property but are also used for businesses when additional funds are needed for a short space of time.
- Typically used when properties are purchased at auction houses etc.
- Generally secured against property.
Main characteristics of bridging loans
- Normally implemented for a minimum of 2 weeks and a maximum of up to12 months.
- APR rates vary between lender to lender, but typically between 0.5% and 3% per calendar month.
- They do not normally exceed 80% loan to value (LTV) for residential properties and about 65% LTV is the norm for commercial properties, but these can vary from your provider.
- They can be either First or Second Charge security tools.
- Bridging Finance is typically unregulated, so, therefore, does not fall under the usual remit of the Financial Conduct Authority (FCA).
Advantages of a Bridging Loan
- They are designed as short term loans compared to either a mortgage from a bank or other similar lender.
- Typically they are available to persons with adverse credit ratings.
- Bridging Loans can also improve credit profile, so long as repayments are made on time.
- Helps to ensure a property can be purchased quickly in the short term and with a view to obtaining longer time finance when and if required.
- Can help to provide quick finance for many auction purchases.
- They can be more flexible than obtaining finance from mainstream lenders.
- Bridging Loans can be turned around in a matter of days up to a number of weeks, which is generally faster than obtaining other finance from any mainstream lender.
Disadvantages of a Bridging Loan
- The associated fees can be quite expensive without negotiation.
- They can be very expensive. Typical rates range from 0.5% to 3% depending on the conditions applied by the lender.
- Lenders typically are not flexible when it comes to late payments.
- A large number can end up in default due to the interest rates being charged.
- Every month the loan remains uncompleted, it attracts compound interest on the sum borrowed.
- Bridging Loans rely on the borrower to secure long term finance themselves or have a suitable exit strategy in place before the application is processed.
- If the borrower defaults, it will adversely affect their long term credit profiles.
If you have any questions you should always get professional advice from a broker or a financial advisor.
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