Seeking bridging finance for property acquisitions is not uncommon in the UK property market.These types of loans are very useful when needing money to cover gaps in available finances. Such gaps can occur when a sale of a property gets delayed, the proceeds of which were expected to fund the purchase of another property. In such an instance, the deal can still go ahead to acquire the property using bridging finance.
In this article, we cover some pros and cons of using bridging finance with property investments.
Pro – Available Funds to Complete Deals
Completing deals on choice pieces of land or property that don’t become available every day is very important to property investors.
Sometimes, great deals only get found and negotiated once a year or not even this often. As a result, losing a deal due to a gap in funding that happens because another sale fell through is detrimental to getting favourable outcomes for property investors.
Con – Costly Funding Compared to a Mortgage
The bridging loan is a more expensive form of lending than either a traditional mortgage or even a bad credit mortgage in some cases.
It’s much easier to lend for a multi-decade period on a dependable property than it is to arrange a series of short-term bridging loan deals with the same amount of capital. The deal churn requires diligent teams to manage the funding and perform due diligence on the security for each loan. This is then repeated to lend the same capital out multiple times over the years after it’s been repaid, instead of only once, as with a traditional mortgage.
Pro – Bridging Loans Can Cover Urgent Business Needs
When applying for a bridging loan, producing sufficient documentation to confirm ownership and the plans for the capital means lenders can approve a loan quickly.
For property investors needing additional capital for their business perhaps to perform urgent improvements or repay a development loan that’s about to come due, the speed and availability of this type of loan is a bonus.
Con – Bridging Loans Often Require a Specialist Lender
Usually, a bridging lending facility is not something you can go and get from your local bank. Most often, they won’t know what you’re talking about when trying to talk to the bank staff about it.
It’s necessary to seek out a lender that’s used to dealing with property investors and property developers. They understand the capital needs of this type of business far better and this enables them to approve loans more quickly.
Pro – Loans Can Be Approved That Wouldn’t Qualify for a Mortgage
In order to take out a mortgage on a home, it has to be completed to an acceptable standard. It must usually be modern enough to be habitable and have at least one functional bathroom and a usable kitchen. Without these facilities in a home, it’s considered inhabitable and more of a development project.
By contrast, a bridging loan is allowed on properties that are still under development with the borrower able to confirm the details of their completion plan. They can then get a mortgage at a later time and repay the bridging loan with the proceeds.
The main thing with bridging loans is to have a detailed project plan before you go ahead. This provides a much-needed guide to keep everything on track and the loan repayable within the necessary time period.