Published 21 October 2024 · Last reviewed 22 October 2024
Benefits of Bridging Finance – The good and The bad and the Ugly
on of the key Benefits of Bridging finance can be a flexible facility for property investors, providing access to funds when traditional mortgage lenders fail to meet their needs and requirements.
However, several misconceptions surrounding bridging finance can deter potential borrowers from exploring this valuable option. In this article, we’ll address common myths, discuss potential problem areas, and explain how bridging finance can be used effectively in the property market.
If one of these benefits applies to your deal, the bridging calculator shows which of our specialist panel lenders match — without an email gate.
Misconception 1: Bridging Finance is Only for Distressed Properties
Many believe bridging finance is only suitable for purchasing currently uninhabitable properties. Classic examples include: no working kitchen or bathroom; fire damage; short leases; presence of damp or asbestos; broken windows, leaking roof, etc. However, there are many other purposes for which bridging can be an appropriate solution.
At Niche Advice we have used bridging finance to help clients for many more reasons, here are some examples below. This can also prepare property investors to make the transition to a mortgage.
- Purchase at auction, particularly those with a 28 day deadline to Complete. The legal process on mortgages is simply not designed to act this efficiently.
- Provide pre-agreed facilities to seize opportunities in competitive markets where quick funding is essential.
- Complete property chains.
- Fund light, medium and heavy refurbishments.
- Cash flow, i.e., provides finance that does not require a monthly repayment.
- Enable the transition of a standard let to licenced HMOs.
- Lease extensions.
- Funds to clear mortgages on inherited properties to make the transfer of ownership possible and keep the asset in the family.
- Allow the acquisition of properties under the market value.
- Clear urgent debts, including settling tax bills.
- Help customers with large debt consolidation needs.
- Provide a solution to major credit issues, including preventing bankruptcy/insolvency.
- Accommodate complex ownership structures, including investor money.
Misconception 2: Bridging Finance is Always Expensive
In isolation when making a direct comparison between bridge and mortgage, “yes” a bridging finance is expensive with higher rates and set-up costs. And, unless the end goal is ‘sale’ of the property the investor/developer should always seek to refinance to a mortgage as soon as practicable.
Weighing the cost against the benefit? Our breakdown of bridging rates and fees shows the typical numbers.
However, think of it this way: the bridge could facilitate the purchase of the property at a far better price and provide the platform for refurbishment so the overall return on investment could outstrip the higher costs of bridging finance.
In short, costs need to be weighed against the backdrop of the whole project.
Misconception 3: Bridging Loans Have a Complicated Application Process
Some potential borrowers assume that securing bridging finance is a lengthy and complicated process, it is simply ‘different’ from that of a traditional mortgage. Benefits of Bridging Finance is that your dealing with smaller lenders with much more streamlined process.
The process is more weighted on the legal aspects than on status approval. Previous project experience counts. There is also more direct and personal interaction, as the Bridging Lender typically conducts a short interview and could visit the site in the case of a development.
There are also Bridging Lenders that offer processes that bring efficiency; examples below:
- Automated valuation models (AVMs) or desktop valuation are used on certain transactions.
- Dual representation legal process allowing the same Solicitors to act for the property investor as well as the Bridging Lender. This can save time and money.
- Use of Title Indemnity insurance removing potential delays at Land Registry.
- Surveyors that can provide more detailed valuations and comments. For instance, on the value before and after work, valuations on sales within short time frames, rental figures on differing bedroom numbers, and values with and without planning permission. At the same time, Mortgage valuations are very limited in detail.
- The interview can deal with questions/concerns in “one hit” rather than being a drip fed impersonal mortgage process.
- Transactions where the repayment/exit from the bridging finance is a “sale” will attract less paperwork as the Bridging Lender does not need to check that a “refinance” is viable for the property investor.
If you select a Property Finance Broker who are suitably qualified, like Niche Advice, they can oversee both the bridging finance and subsequent remortgage so the paperwork will be further streamlined.
Misconception 4: Bridging Finance is a Risky Option
Another common misconception is that bridging finance is inherently risky. While it does come with its challenges, such as short repayment terms and potential financial strain if the project doesn’t go as planned, the risks can be mitigated through careful planning and a solid exit strategy. Borrowers who conduct thorough due diligence and work with experienced Property Finance Brokers can significantly reduce potential pitfalls.
Misconception 5: You Must Have Perfect Credit to Qualify
Many individuals think that only those with perfect credit scores can qualify for bridging finance. Benefits of Bridging Finance Lenders primarily focuses on the property’s value and the borrower’s overall plan rather than solely on credit history. If you have had credit issues and have addressed them, this can be seen in a better light.
If the planned exit is a ‘sale’, then there will be greater tolerance for credit issues.
In the case of a refinance the key is to demonstrate you can secure financing even with a less-than-perfect credit score. This normally is done by working with your Property Finance Broker on a ‘decision-in-principle’ from the take-out remortgage lender, to show to the Bridging Lender in their assessment.
Common Problem Areas in Bridging Finance
While bridging finance can be advantageous, several problem areas can arise:
- Lack of Detailed Research: Failing to research the property and its potential issues thoroughly can lead to unexpected problems post-purchase.
- Unforeseen Costs: Hidden costs such as repairs, legal fees, and auction fees can add up quickly. It’s crucial to budget for these expenses to avoid financial strain.
- Short Repayment Terms: Bridging loans typically have short repayment periods, often ranging from 1 to 12 months. If the project takes longer than expected, borrowers may face difficulties.
- Market Fluctuations: Changes in the property market can affect the value of the investment. A property that seemed like a good deal at the time of purchase may not perform as expected.
Benefits of Bridging Finance – Using Bridging Finance the Right Way
To leverage bridging finance effectively, consider the following tips:
- Have a Clear Exit Strategy: Whether it’s selling the property or refinancing, having a clear plan for repaying the loan is essential. This reduces stress and helps you avoid financial pitfalls.
- Conduct Thorough Research: Before committing to a property, perform due diligence. Understand the market, potential renovation costs, and any legal issues that may arise.
- Select the right Property Finance Broker: Engage an experienced broker who understands and can process both bridging finance and remortgages. Who can support you through the transaction, help you secure favourable terms, and navigate any challenges
- Budget for Additional Costs: Factor in a contingency sum of money for potential hidden costs to avoid financial strain. Working out a comprehensive budget can help you manage your cash flow effectively.
- Stay Informed About Market Trends: Understanding current market conditions can help you make informed investment decisions and maximise your profit.
Conclusion
Benefits of Bridging Finance is that I can be a highly effective tool for property investors, but misconceptions can lead to hesitation or missed opportunities. By addressing these myths, understanding potential problems, and employing effective strategies, you can use bridging finance to your advantage. With the right approach and guidance from specialist Property Finance Brokers, such as Niche Advice, bridging finance can open doors to new investment opportunities and help you achieve your property goals.