October 22, 2018
When property professionals need to borrow money for short periods of time, there are a number of different options available. Typically though, a bridging loan can often offer a very convenient way forward. It’s designed to ‘bridge a gap’ — to give you access to the cash you need until a more permanent solution is put in place. But like all forms of lending, there are a number of risks involved that you should consider before making a decision. Here, we’ll take a closer look at what those risks are, and how you can plan around them.
A bridging finance arrangement is a secured, interest-only loan on a property. Like a mortgage, the property is at risk of repossession if the loan isn’t paid back in time. But unlike a mortgage, the loan is for a short period of time (from a few weeks or less, up to usually no more than a year). And instead of paying back the capital and interest in monthly instalments, you usually pay it back as one lump sum.
Here’s a roundup of the key features of a typical bridging loan:
Late or non-repayment will give rise to penalty interest charges and in the most serious cases, repossession of the property. To avoid this, you should allow yourself some leeway when arranging the loan. This might involve setting the fixed repayment date a day or two after the completion date on your linked sale, for instance. Or if the loan is to cover refurbishment and you think the property will be ready to go on the market in 3 months’ time, perhaps allow 6 months for the loan period to allow for snags and minor delays.
Like any borrowing arrangement, if you breach the conditions, it opens up the possibility of penalty charges — and even of cancellation of the arrangement with immediate effect.
As an example, if your exit plan involves the sale of a commercial property following refurbishment, the lender may insist that you don’t let out all or part of the property while the works are underway. There’s a good reason for this, as sitting tenants can delay a sale if they fail to vacate in time.
This is why it’s important to read the terms of the arrangement carefully before entering into it, so you fully understand your obligations.
The clearer you are on your exit strategy, the lower your risks. You don’t necessarily need to know the exact date on which you’ll be able to pay everything back (after all, that’s where open loan arrangements can help you). However, you do need to be able to identify a clear path for repayment, whether it’s through the sale of the property, refinancing to a longer-term mortgage — or receipt of cash from another source (sale of another property in your portfolio, for instance).
At the same time, to get the best possible terms and a flexible arrangement tailored just for you, it helps if you have access to a bridging finance specialist. If you’re interested in learning more about how to make the most out of your property opportunities, browse our guide to property finance below or speak to West One Loans today.