There are many benefits of using bridging finance for a short-term loan, but there are two main considerations to be aware of before deciding to apply.
1. Risk
The main risk to bridging finance is perhaps the main risk for any type of loan – being unable to pay it back. A bridging loan will be for a set period, usually up to one year. If the borrower repays early, usually there are no fees charged for early payments, but if the loan is not repaid within the agree period, then fees, penalties and extra interest will be charged. If property has been used to secure the loan, there is the danger that the lender could try to repossess the property to repay the loan.
Another effect for late payment of a bridging loan is that the credit history of the borrower will be adversely affected.
To keep risks to the minimum, the borrower’s exit strategy needs to be sound. The exit strategy is a plan for when and how the bridging loan will be repaid. A strategy often relies on long-term finance such as a mortgage. An example of an exit strategy is when a bridging loan is used to raise money quickly to complete the purchase of property while waiting for a mortgage to be completed. As soon as mortgage funds are available, the bridging loan can be repaid.
A lender will turn down a bridging loan application if they are not convinced that the exit strategy is realistic. The lender does not want borrowers to default on their loans, which makes them cautious when assessing the value of an exit strategy.
2. Cost
The interest charged on bridging finance is often higher than a mortgage or other loan. This is because most lenders regard bridging loans as higher risk. However, bridging loans are for a short period only and interest is only charged until the loan is repaid.
A borrower may have to pay an arrangement fee in addition to the interest,
Bridging loans are flexible and can be arranged a lot more quickly than mortgages. For most borrowers, the advantages of bridging loans outweigh concerns about paying high interest rates and fees.
Getting advice
A borrower needs to be aware of the risks involved in bridging finance. It helps to get independent financial advice from an expert who can explain the advantages and disadvantages of taking out bridging loans.
Talk to an advisor at Ascot Mortgages who can take you step by step through the complete process of applying for, using and repaying a bridging loan.
A borrower needs as much information as possible about all aspects of bridging finance so that they can make informed decisions on whether or not it is the right decision for them.
After a decision has been made to take out a bridging loan, Ascot Mortgages find the most suitable one for you. We can also arrange the mortgage you can use to repay the bridging loan.
