The property finance market is nothing new and most people will be well aware of how a mortgage works, how to apply for one, the requirements and all of the pitfalls and the nitty-gritty that is worth knowing. However, when it comes to moving property or expanding your portfolio by purchasing successive properties, what kind of finance is out there and how does it work?
There are a wide range of property finance options, some being very specialised such as auction, development, refurbishment and even agricultural finance arrangements (Source: SPF Loans). however, by far one of the most popular property loans to take out is the bridging loan.
Bridging loans are a popular method of funding property transactions in the short term where a degree of speed in required and where there is a ‘gap to be bridged’ in respect of the property sale and the subsequent purchase. For example, in the case of someone who owns a property but who is looking to move to a larger property. It is highly likely that the sale of the first property will be used to fund the purchase of the second. However, it may be the case that the property owner will lose out on the second property if they do not complete the purchase within a set time.
If they haven’t found a buyer for the initial property, they could come unstuck and miss out on the new property which would send them back to square one; having to look around all over again just to find a property.
This is where bridging finance comes in. Say the property owner has £50,000 of savings to spend on all the legal charges and administration fees; instead of having to miss out on the second property, they can take out a bridging loan and put down the money they need to in order to secure that second property. Once they sell the initial property, the money from the sale will go towards paying off and clearing the bridging loan.
Are there any Risks?
As with any secured loan, in the case of bridging loans there is always the risk that the property owner could lose their property if they default on the loan and do not keep up repayments. As part of the application process there will be affordability checks and the lender will test the ‘exit strategy’ of the borrower. The ‘exit strategy’ is their strategy to pay off the loan and exit it. If the exit strategy does not satisfy the lender, they will be less inclined to provide a reasonable rate for the loan and in some cases will not provide a loan at all.
Another risk that should be kept in mind when it comes to bridging loans is that these loans, as short term loan arrangements will have higher interest on them in order to offset the risk to the lender. Furthermore, you will not be able to borrow more than around 75% or so of the initial property’s value. This is so if the borrower does default, there is enough equity in the property for the lender to recoup their losses.
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