Bridging LoansCategories: Conveyancing, News, Property
What you need to know.
Bridging loans, also known as bridge financing or gap financing, are short-term loans that are usually used to bridge the gap between the purchase of a new property and the sale of an existing property. These types of loans are often used by real estate investors, developers, and homeowners who are looking to purchase a new property before selling their current property or where investors are looking to acquire funds quickly to purchase a property before obtaining later finance. However, it is important to be aware of the risks associated with bridging loans before making the decision to use one.
One of the biggest risks associated with bridging loans is the high interest rate. These loans typically have interest rates that are much higher than traditional mortgages, which can make them more expensive in the long run. Additionally, the interest on bridging loans is typically charged on a monthly basis, which can add up quickly if the loan is not paid off in a timely manner.
Another risk of bridging loans is the short repayment period. These loans are typically only for a term of a few months to a year, which means that borrowers need to have a plan in place for how they will pay off the loan before the repayment period is up. If the borrower is unable to pay off the loan in the allotted time, they may be faced with additional fees and penalties or worse the lender will look to take possession of the property or land.
Bridging loans also typically require a higher deposit than traditional mortgages. This means that borrowers will need to have a significant amount of cash in hand in order to qualify for the loan. Additionally, borrowers will typically need to have a good credit score in order to qualify for a bridging loan.
It is also important to note that bridging loans are typically secured against the property being purchased, which means that if the borrower is unable to repay the loan, the lender may be able to seize the property. This can have serious consequences for the borrower, including the loss of the property and damage to their credit score.
Furthermore, many lenders ask for personal guarantees as well as the charge against the property. This means, that your personal assets, such as cars, houses and other items are at risk of being seized should you fail to make the required repayment.
It is therefore incredibly important to have an exit strategy in place and understand the ‘what if’ situation if your exit strategy fails. Unless you know for sure that you can repay the loan at the end of the term whether your exit strategy succeeds or not should be fundamental to considering whether you proceed.
In conclusion, while bridging loans can be a useful tool for those looking to purchase a new property before selling their current one, it is important to be aware of the risks associated with these types of loans. These risks include high interest rates, short repayment periods, high deposits, and potential foreclosure on the property. It is highly recommended to consult an expert solicitor or lawyer before taking any step in the process of bridging loans.
Should you be considering a bridging loan, please contact one of our expert team to see how we can assist.