A quick guide to bridging loans and their uses
During the last 2 years the amount of money being borrowed through the use of bridging loans has increased by around 100% each year. During the same period other methods of finance have continued to be depressed, along way from the levels seen 5 years ago. Because these other methods of finance have remained difficult to obtain customers have been turning to bridging loans to provide them with alternative finance. They have also be increasingly used to hold property sale chains together at a time when buying, selling and financing property purchases has become increasingly difficult.
Bridging loans are a popular method of funding for buying property at auctions. The main reason for this is that after winning a bid at auction the buyer normally has just 28 days to complete the purchase otherwise they may lose their 10 per cent deposit. For some auction lots this deadline for completion can even be reduced to as little as 14 days. Bridging loans can be put in place quickly, which enables buyers to complete their purchase within the agreed time limit. Another advantage to using a bridging loan to buy at auction is that they can be used to raise finance when secured on property that is in a poor condition and in need of restoration. Other lenders can have issues with lending against property that requires repair work, so to avoid these problems, especially when time is of the essence bridging loans are often the preferred finance method.
It is very important to remember that before bidding for a property at auction make sure that you have your finance in place. Also ensure that you have looked around any auction property that you intend to bid on beforehand, ideally even have it surveyed, and have the legal packed checked over by your solicitor. Being well prepared before bidding at auction can save you thousands!
The growth in bridging lending has been made possible through the availability of additional funds from lenders who have been attracted into this market. During the last couple of years each month has seen new lenders entering the market and this has led to increased competition and better bridging finance deals. The improved deals have been another factor for the growth in bridging loans, as customers who do have alternative finance facilities available turn to bridging finance in order to get the best possible deal.
With regards to bridging loans it is very important to keep in mind that they are a short term method of finance and should never be used as a long term option. Therefore you need to make sure you have an exit strategy in place in order to repay your bridging loan. Please make sure your exit strategy is reliable and won’t let you down. Typical exit strategies are selling a property or refinancing. If refinancing, it is important to ensure that the refinancing facility you are intending to use is available, and that you and the property meet the lender’s criteria.