The basic requirements for taking out a bridging loan
There are times when large amounts of money are temporarily required in order to provide a bridging facility until money is received from another source, or from the sale of a bargain item that can be quickly purchased. For this type of facility a bridging loan is frequently used because this type of specialist finance facility can provide the most convenient and cost effective solution. Bridging loans are specifically designed to provide short term finance and can be arranged and put in place ready to use quickly. This type of facility can be taken out for terms of just 1 day extending to maximum terms of 18 months, although most lenders offer a maximum of 12 months and some can be half this.
It is important to realise when taking out a bridging loan that they are short term facilities and can be very expensive if used as a long term finance option. This is because the monthly rate of interest is higher than the longer term finance alternatives, and to stretch the agreed term may lead to penalties or other additional charges.
In order to take out a bridging loan the lender will want to know what the loan is going to be used for. You will also need to be able to provide security in the form of a house, flat, commercial property or land, which the lender can use to secure their loan. If required, more than one property can be used to secure a bridging loan. You will also need to be able to provide or demonstrate an exit route for the loan. This is how you intend to redeem the bridging loan on or before the end of the agreed term. Typically this would be from the proceeds of the sale of a property, from money owed to you, funds from an investment policy or from refinancing. If selling a property to repay the bridging loan, for which a sale has not yet been agreed, the lender will need to be satisfied that the asking price is realistic taking into consideration the area and demand for that type of property. More importantly though, if refinancing in order to redeem the bridging loan, ensure that you able to raise the required finance. The lender will also need to be satisfied that you should be able to arrange an alternative long term finance facility. It is always worth having a backup plan in case your exit strategy experiences problems. For example if there is a problem with refinancing are you able to sell the property reasonably quickly and obtain a satisfactory asking price?
When short term finance is required bridging loans often provide the simplest and most cost effective method of raising the required funds. However, check with us first to see if there are any alternative finance options that might provide a better solution. Then if bridging is the most suitable option make sure you have a good exit strategy in place.