The latest figures suggest that the slowdown in lending to property developers around the time of EU referendum in 2016 hasn’t recovered a great deal and the banks in the UK are becoming tighter with their lending criteria, alternative options for funding have become more favourable. One of them being bridging finance.
So, what is bridging?
Bridging loans are a short-term funding option. They are used to ‘bridge’ a gap between a debt coming due – and we’re talking primarily about property transactions, here – and the main line of credit becoming available. Or they can simply act as a short-term loan in pressing circumstances. They can be invaluable in helping a property purchase that otherwise would not be possible.
As banks and building societies have grown more hesitant to lend in the wake of the financial crisis, there has been an influx of bridging lenders into the market. However, rates can be high and there can be hefty administration fees on top. Indeed, potential borrowers are warned there is a risk of getting ripped off unless you proceed extremely carefully. If you take out a bridging loan, you could incur interest rates of up to 2% a month – meaning 24% a year.
Who are bridging loans aimed at?
In general, bridging loans are aimed at landlords and amateur property developers, including those purchasing at auction where a mortgage is needed quickly. They may also be offered to wealthy or asset-rich borrowers who want straightforward lending on properties.
When should you use bridging loans?
Bridging loans can be used for various reasons, including property investment, buy-to-let and development. However, more recently, there has been a growing trend among borrowers to use bridging loans because high street and private banks are taking longer to process applications for larger loans.
Some borrowers are also viewing bridging loans as a simple alternative to mainstream lending. While a bridging loan may sound tempting, if you’re thinking about taking one out, you need to think carefully about your exit strategy. This might, for example, involve getting a mainstream mortgage or a buy-to-let mortgage, or selling the property altogether.
The problem is, you may not have any guarantee of being accepted for a mortgage with a mainstream lender after having taken out a bridging loan. This could put you at risk of losing your property.
The FCA is concerned that advisers could be recommending this type of loan too quickly when it may not be the best solution.Importantly, if you’ve not used this type of finance before you need to tread carefully, as there are often hidden and hefty legal fees and additional administration fees that are not always made clear. All of these mean the cost of your bridging loan could soon mount up. Put simply, bridging loans should not be viewed as an alternative to mainstream lending.
Where can you get a bridging loan?
If you want to take out a bridging loan, it’s advisable to go to an FCA-regulated broker because they will only recommend a bridge if it is appropriate for you and your particular circumstances.
ABL is an FCA-regulated broker and if you’re in need of finance and think that a bridging loan might be the best option for you:
Email Ian, email@example.com or call on 01274 965356.