When you ‘bridge finance’ to buy a property, what you’re essentially doing is getting the finance for the purchase a little early in order to make a payment.
How this works is that money is borrowed to pay for the property under the assumption that finances will become available to you shortly. A popular example is when a borrower wants to pay for a property but their own property’s sale has not been finalised or the funds not transferred yet. A bridging loan allows the buyer to borrow the money for the property and pay it back as soon as their funds become available.
These loans became incredibly popular shortly after the 2008 UK economic recession because when banks were less confident in granting UK mortgages at all, they essentially opened the floodgates for bridging loans from other lenders. The problem with this was that some people were using them as an alternative to a mortgage, and that’s not what bridging loans are for. Bridging loans are designed to be short-term, over as much as a 12-month period, with an interest rate of approximately 10% – 12% for the year.
This high interest rate suggests a lot of risk for borrowers. At Coreco, we understand that a product such as a bridging loan is only as risky as the borrower’s individual circumstances. At the same time, we appreciate the inherent opportunities that these types of loan can offer. To give a clear picture of both sides, we’ve compiled examples of the best opportunities and most hazardous risks associated with bridging finance.
As mentioned above, bridging loans are meant to bridge a gap between payment and when funds can be obtained. Therefore, they tend to be short-term loans. In fact, the term of the loan can be as short as one week. If the money for a property isn’t ready by the time payment is expected, there is a risk of losing the property to someone offering a more attractive deal. Bridging finance eliminates that gap in payment and the risk of losing the property to a competing buyer. This is known as ‘chain breaking’ and we detailed this and other reasons why you would want bridging finance in one of our House and Home blogs. The flexibility of these loans’ duration means they not only make it much easier to guarantee a property will be yours, but can also significantly shorten the buying process. A residential mortgage will typically take nearly three months to complete, while a bridging loan obtained through a mortgage lender is usually completed within two weeks.
There are other advantages to bridging loans, too. They tend to be more available to borrowers with poor credit and, if payments are made on time, they can do wonders for your credit rating. It’s also safe to assume you’ll have better bargaining power because bridging loans essentially make the buyer a cash buyer. Sellers prefer a cash buyer because it means there’s no chance of a mortgage being denied and, because of this, are often happy to take a lower offer.
A bridging loan doesn’t necessarily need to be used exclusively to purchase a property. They’re also helpful if you need finance to refurbish a property before selling (lenders tend to withhold some of a mortgage if there is significant work to be done on the property being sold) or for buying a property at auction, where they can sell for much less than their market value.
It’s important, however, that borrowers don’t rush into bridging finance, despite the opportunities these loans can bring. One of the most significant risks of bridging loans is that they are very expensive. Because they are designed to be short-term and for large amounts of money, lenders will be expecting large returns over a short period of time. Borrowers can also expect big fees to pay if you miss a payment and compound interest to be added, which means the debt can easily spiral out of control.
Perhaps equally risky is the reliance on longer-term finance. Bridging loans are designed to fill the gap between payment and availability of funds, so you would likely borrow before you have secured long-term finance. If, for any reason, that finance fails to come through, the borrower will be left with a very expensive debt. Even if alternative funding can be secured later, the delay in getting new long-term finance will mean paying back a much more expensive loan over a longer period of time.
A large number of bridging loans end up defaulting due to borrowers underestimating how expensive the interest can be. Very careful consideration is essential before you decide to go down the bridging finance path. For this reason, we strongly recommend that you seek professional advice before putting your finances and your home at risk. To find out more about Coreco’s Bridging Finance services you can follow this link or, if you would like to get directly in contact with one of our advisers, use our contact page to get in touch. We have decades of experience and can help you to establish your own level of risk and secure the best possible deal on a loan.