Plan ahead before taking out a bridging loan
Bridging loans have many advantages over other methods of finance, but they also have some very significant drawbacks and disadvantages. The drawbacks are they usually have an expensive monthly rate of interest, meaning as a long term method of finance they are very expensive, and also bridging lenders only lend for the short term, meaning they want to have their loan repaid by the end of the agreed term.
Some bridging lenders are now offering medium term facilities for loans over periods of 1 to 3 years, but generally bridging loans are for periods of up to 6 to 12 months.
When taking out bridging finance it is extremely important to have an exit strategy in place. An exit strategy is the method by which you intend to pay back your bridging loan.
Taking out a bridging loan without a suitable exit strategy in place must be avoided! In addition entering into a bridging finance agreement with a poor exit strategy should also be avoided.
Typical exit strategies borrowers have to clear bridging loans would be to clear their loan following the sale of a property or some other asset. For this type of planned exit strategy you should consider when the property sale will complete or is likely to complete. You should ask yourself and consider, is there a buyer in place, have contracts been exchanged? If contracts are not in place what if the buyer pulls out or is unable to raise the finance or mortgage that they require? Do they already have a mortgage offer? If there isn’t a buyer in place how long is it likely going to take in order to find one? Has there been much interest in the property? Is the property over priced? How much would the price have to fall in order to achieve a quick sale?
It could be that the bridging loan will be repaid from the proceeds of an outstanding debt, in which case you may want to consider the chances of having the debt repaid and if for some reason it wasn’t , what other options do you have available to you in order to repay the bridging loan.
If you have taken a bridging loan out to fund building or restoration work, and plan to repay the loan by refinancing the property once the work has been completed, are you certain that you will be able to obtain the required long term finance facility. Even if you haven’t had problems obtaining finance in the past, consider that since the credit crunch obtaining finance has become more difficult than it used to be!
When considering bridging finance, plan ahead, have some back up plans and look at all the costs involved and plan some contingencies. You may find that when all the figures are added up that it might not be worth it after all!