Bridging financing has become one of the alternative ways of getting finance. However, it’s advisable that one gets to understand what it actually entails. Raising finance for your property investment is an area that’s changing constantly. For instance, every lender almost has its own unique set of requirements that borrowers should meet.
A key thing about being in the property market is the fact that there are many ways of raising finance. It’s possible to come across an ideal refurb opportunity but fail to get the standard buy-to-let lending. That might be because too much work is required in the process to secure finance. When such happens. it is the perfect time to think about bridging financing.
Raising Finance Fast through Bridging Financing
Securing finance can be such a huge barrier to property investors and more so with the prevailing economic climate. Buy-refurbish-refinance is such a fantastic idea and a very popular investment strategy. However, there are instances where one finds discounted properties that can be quite expensive to refurbish especially if you don’t have the needed money ready. One might prefer entering into a joint venture which is a common practice within the industry. Although, the alternative way of financing such is with the help of bridging finance.
These are loans that are useful for those in need of faster access to a secured short-term loan. The loan may be taken to help with refurbishing a property quickly. Bridging finance can be such an advanced strategy and it requires one to be well conversant with what they are actually trying to do. Bridging finance can also be quite expensive. For example, if in case you are lining up a purchase now that you expect to complete within a couple of weeks and you have opted for bridging as a way of financing it; there will be hefty fees payable to the lender for the setup process.
When to consider bridging financing
Bridging should be considered if you are purchasing a low-value property. A lot of work goes into engaging lenders. You may also fail to find many buy-to-let lenders that are willing to fund it. Bridging financing then becomes the best financing alternative to consider. If you have the cash needed to purchase and refurbish the property then you can consider that. However, you may also want your cash to be free so as to use it on other deals and also as a way of protecting your cash flow. In such a case, bridging becomes the only option as much as it can be expensive.
For example, a loan amount of £50,000 can attract a fee amount of £2,000. On top of that, you are also likely to pay an interest amount of 1.5% per month. You can contrast that charge with a 2.25% for a typical buy-to-let loan. It can be worth it for the borrower. This is due to the fact that the property to be bought is cheap and after refurbishing it, the value of the property will likely increase. Within a period of six months, you can then choose to go to a conventional buy-to-let lender who may grant you buy-to-let mortgage, and that provides you with the opportunity to switch out of the bridging loan.
Short term nature of bridging financing
So the bridging loan may just be used for short-term and you may not end up being stuck with it forever. Bridging loans may go for three months with some lasting for six months. There are also those that might extend to 12 months and beyond but you will likely pay high fees for such.
The challenge arises in this scenario if you have six months bridging loan and you opt to extend the loan beyond that period; many bridging lenders will charge you fees and it can be quite expensive. If in case you’re paying 1.5% a month, it might even go to 2.5% or more as a penalty if in case you miss repayment at the expiry of the loan period.
It’s advisable that you have a clear plan with your broker so that you can easily switch from bridging loans once the time comes. With prior arrangements with your broker, you can easily go off bridging to a conventional buy-to-let loan. However, in the short term; opting to use a more expensive bridging option makes it possible for you to access deals that many buyers might not touch. Bridging makes it possible for you to enter a deal that might have not been possible and other circumstances.
Here are some of the factors that make bridging financing the best option for more deals;
Bridging loans are quick
Property bridging loans provide a way of getting quick access to capital. Once you land a perfect property deal for your portfolio, there is likely to only be available a small window of opportunity for the sale to be completed. This comes handy when the property you have identified is on market for a good price and it’s something you don’t want to miss.
A bridging loan is considered a short-term financial solution. It, therefore, gives one access to the needed funds quicker than when borrowing from other forms. In this way, you can get the funds needed within the set deadline and be able to secure the property. There are instances where you can even raise 100% of the purchase price through a property bridging loan.
Bridging finance is flexible
When compared to the traditional mortgages and high street lending; bridging finance is considered to be far much more flexible. Mainstream lenders normally require a lot of information from you before granting the needed finance. They will require information about your credit history, income, and others before they agree to a loan. If you fail to meet the set criteria then there are high chances of not getting finance from them.
Bridging finance lenders will, however. Need information about the property since it’s the property that’s used as security for the loan. The sale of the property is then your exit strategy for the repayment of the loan. With bridging financing, the repayment terms can be amended to suit the borrower. The loan should however be repaid within the set short period of time.
If you’re looking for financing that will get you more deals then it’s advisable that you consider going for a bridging loan.