Beginners Guide to Bridging Finance
The learning outcomes for this article are to:
- Understanding bridging finance for property development and how it works.
- Benefits and drawbacks of a bridging loan
- Requirements to take on a bridging loan
These might be common scenarios, whether you are purchasing land, wanting to buy a commercial building, buying from an auction or completing on your dream house before selling your current residence. If you have experienced it, you may well have heard about bridging finance. It can be a flexible way of purchasing. Let’s get into the details:
Bridging finance, also known as bridging loans, can be a useful way of buying a property. As this loan requires security which can be your personal residence, it is crucial to inspect the ins and outs of the process. Finspace shares some of the things you need to know about bridging finance.
Bridging Loan for Property Acquisition
A bridging loan is designed to allow buyers to acquire property without selling their assets. You can take out a bridging loan for up to 12 months. During the period, you can pay your current mortgage, plus interest on the new land or house – subject to the lender’s approval.
There are two types of bridging finance – open and closed.
Closed bridging finance is for sale on both the properties – the new and the current one- all you need to do is minimize the space between the two payment dates. In contrast, open bridging finance is used when you want to buy another property without selling your current. The lender will work with you on the structure you’re lending until the property is sold.
Advantages and Disadvantages of Bridging Finance
There may be a risk involved in bridging loans for property development. So it’s better to weigh the pros and cons equally.
Pros: If you have earmarked your dream property investment, a bridging loan can help it turn into a reality without selling any current assets.
Cons: If things don’t go according to your plan, the abovementioned pros will quickly convert into a con. If your home or property does not sell in time, you might be at risk of repossession.
Bridging loans are expensive because:
- You are covering your current property mortgages repayment on the new property
- You are covering the interest-only payments
Because of the risks around the opening bridging loan, you will need to be confident that you can take it on as an investor. That means there are a few basic requirements you need to know:
- Financial stability to satisfy lenders that you can pay all debts
- Plan B in case of risks
- Realistic expectation of what your property will sell for.
Bridging finance is an effective way to buy a new property, with a fair risk involved. It’s better to get professional brokers‘ advice to discuss your options.