The uses of bridging loans and development finance
Bridging loans secured lending facilities that are specifically a short term way of raising finance. They are short term because the bridging lenders are not looking to lend for longer periods than between 6 to 12 months and also because it is very unadvisable to take a bridging loan out for a long term due to them having a high monthly rate of interest. If finance is required for the short or long term then other loan facilities with lower monthly rates of interest would be a much better option.
Even though bridging loans may have a high monthly rate of interest, for short term lending a bridging loan is often the cheapest option when set up costs and early redemption charges are all taken into consideration.
When compared to other methods of finance bridging loans can be put in place quickly which makes them a useful way of raising capital when large sums of money are required urgently. In addition bridging lenders offer flexible lending criteria when compared to other types of finance. The bridging loan providers are more flexible with regards to credit history, income confirmation and most importantly the construction and condition of the property that is being offered as security.
For people who buy property at auction, once they have made the winning bid they usually only have 28 days to complete the purchase. Once a winning bid has been made the auction house will require a 10 percent deposit at that time and the balance within 28 days. Because time is limited, bridging loans are a popular method of raising any finance required to complete the purchase.
Because bridging loans can be secured on property that is in a dilapidated or run down state of repair, they can provide the finance required to purchase and restore such properties. When the restoration work has been completed the property can either be sold in order to repay the bridging loan, or as an alternative a more traditional method of finance can be put in place to refinance the bridging loan.
Similar to bridging loans is development finance, which is used to fund property conversion, extension or new developments. Development finance can be arranged for periods of typically up to 3 years, which is often the time taken to complete large developments. When taking out development finance many lenders will require the applicant to have past experience with similar developments to the one that is being proposed. If there is no previous experience it may be advisable to employ someone who can provide the required expertise.
Both bridging loans and development finance have set up costs in addition to monthly interest charges. It is extremely advisable to get your budget and cash flow right before entering into any agreements, and to help you achieve this you can use a bridging loan calculator to help calculate monthly interest charges and other fees. A bridging loan calculator will work out monthly interest charges when the amount of finance required and monthly interest rate are entered. The better bridging finance calculators will also calculate arrangement fees and add them to the lending facility.