Bridging loans are specialist forms of finance that are used to provide short term loan facilities usually of £100,000+ for short periods, typically between 1 to 12 months. Bridging loans are used as their name suggests to “bridge” the gap in finance when a property is purchased as part of a chain, but dates for completion haven’t yet been finalised.
So What Are The Alternatives To Bridging Loans?
Funds may be needed quickly to pick up a bargain investment property that allows investors to use a bridging loan to fund a purchase, which is then typically refinanced by purchasing a mortgage six months later. Nevertheless, it is possible to buy an investment property by obtaining a mortgage within as little as two weeks!
Anyone with short-term cash flow issues may benefit from a commercial bridging loan. Still, they may also be able to release funds locked up in their properties by asset refinancing or using invoice finance to release money owed from outstanding invoices.
All asset refinancing and invoice financing can be applied quickly and can offer a much cheaper solution to bridging loans. Substitutes include construction finance, business loans, secured loans, business mortgages and asset loans.
If you still think a bridging loan is the only option on the table, here are a few things to consider.
What To Consider Before Taking Out A Bridging Loan?
Planning An Exit Strategy
Bridging loans are not meant to be used as a form of long term finance. It is, therefore, necessary that you have an exit strategy in place so that you can repay the loan on time.
Missing your loan repayments can affect your credit score. Not only this but these kinds of loans usually have higher than average rates of interest, so getting hit with a late fee on top of the higher than normal repayment rates should be avoided. Your exit strategy should, therefore, be reliable, and if you can’t be sure that it is then come up with a back-up exit plan in case your original plan fails.
Getting A Quick Sale For Your Property
One of the most commonly used exit strategies is to get a quick sale on the property you invested in or another property in your portfolio and pay off your bridging loan with the cash generated from that. It’s a good idea to work out “quick sale prices” for all of your properties so if you can achieve a good quick sale if necessary.
Refinance To Repay Your Bridging Loan
One option you could use instead of an exit strategy is to refinance. This will usually be used if the bridging loan was used to help fund reconstruction, restoration and other building projects and new developments.
When the property is sold, and you are in a position to whereby it can be used as collateral for a more conventional mortgage, the purchase of a mortgage, commercial mortgage or other long-term facilities may be used to repay the bridging finance.
Sometimes bridging loans are just taken out to enable the purchase of an absolute bargain which will then be sold for a quick profit.
In these circumstances make sure that you are confident that the bargain item is precisely that, and if it doesn’t sell for a profit ensure that you have alternative funds that you can use to repay the bridging loan.
The Six Month Rule
Remember that many leading lenders have a six-month rule (or even 12 months with some lenders) that means they will not provide funds to purchase a property if the current owner hasn’t owned it for at least six months.
This could, therefore, affect your proposed sale if you intend to sell the property within six months of owning it because prospective purchases may find it difficult to arrange a mortgage due to the six-month rule.