Uses and Advantages of Bridging Loans
- 12th November 2018
- Posted by: Loanable
- Category: Resources
There you are, at Point A with a property, and you need to get to Point B with the property, or get to Point C with another property, use your existing property to purchase another property.
How can you do this?
A bridging loan may be the answer.
A bridging loan is a secured short term ‘interest only’ loan that bridges a financial gap while a more permanent form of finance is secured.
A bridging loan is a secured short term ‘interest only’ loan that bridges a financial gap while a more permanent form of finance is secured. Mostly used for property deals, it’s money that is available almost immediately, giving the borrower time to secure more long term and usually cheaper financing – such as a mortgage or sale.
There are a few times where a bridging loan is not only useful, but also has advantages over other forms of borrowing.
A bridging loan can be arranged quickly, and in many instances, may be the cheapest alternative for accessing the funds you need.
Bridging loans can also be useful for properties that may not be suitable for standard financing. You may need to renovate a property, or improve it to come up to standard, here is where a bridging loan can help.
Did we mention how quickly bridging loans can be arranged?
By having equity in one property and borrowing against it, there is a quicker underwriting process, and you can get the funds faster to secure your new property.
Advantages of a Bridging Loan
* Maintain a place in a sale chain
* Quick to underwrite and approve
* Can be used for property requiring renovations
* Can be a cheaper alternative to standard mortgages
* Good to restore a property
* Good for auction purchases
* Can be used to sole short-term cash flow issues
Some Uses for a Bridging Loan
Since bridging loans are quick and easy to get approved, they have many uses. Naturally what the loan amount you can borrow will depend on the equity and valuation of the property you are using for the bridge loan, as the loan is secured by that particular property.
To Buy, Renovate, or Save an Existing Property: Bridging loans offer the opportunity to access quick cash due to the equity you may have in one property, so it is logical to use that equity and cash to buy another property.
Possibly one that may not either fit into standard financing, or as in the instance of buying a property at auction, you need the money quickly.
If you are a landlord with a property portfolio, or a property developer, not all properties come in perfect “move-in” condition. Some require renovations and improvements, and these renovations can make securing standard financing difficult.
A bridging loan can help. Use your existing equity and property to secure the financing on a new property.
This is also helpful if you are in a chain in the sale of a property. You are trying to sell an existing property, and have found the new property of your dreams, and you don’t want to lose out. A bridging loan can keep that dream alive and you in the chain.
Short-Term Cash Flow Issues: Many may not realise but a bridge loan can aid in helping a company or business with a short-term cash flow problem.
If the business owns property with equity, they can borrow against this property to increase their cash flow. As bridging loans are a form of short-term financing, the cash needed can be provided quickly, but also is to be paid back in a relative short period of time.
If a company is waiting on receivables or other monies to come in, a bridging loan can help out during that period.
Prevent Repossession: If the owner of a property is attempting to sell it, and the property is under the threat of repossession, in some instances a bridging loan against another property can be used to pay off any arrears, which allows the seller additional time to sell the property on their terms, and not a forced sale.
Are There Any Disadvantages to a Bridging Loan?
While the use of bridging loans are many, and they have various advantages, there are two factors that must be considered and remembered:
* They are a short-term loan
* The interest rates can be higher than other forms of financing
Closed bridge loans have a fixed repayment date, usually 30 days or less.
Open bridge loans have no set fixed repayment date.
Both can carry higher than normal interest rates, and it is very important that the borrower has an exit plan, a way to repay the loan.
Lenders will consider and look at the borrowers plan to repay the loan and exit the bridge, as a part of underwriting and approving the loan.