Bridging loans can be used for a wide range of uses and put simply, it is a very convenient way of raising finance against property within a short period of time.
Bridging lenders have the ability to move very quickly and are generally more flexible in terms of the condition and type of properties they will lend against. They will also tend to look more towards the property as opposed to the borrower and they have the ability to lend against value instead of purchase price.
Lending against value, as opposed to purchase price can have significant benefits for experienced developers/property experts who are often able to identify a bargain or perhaps create value by buying an option to purchase at a lower price and then securing a planning consent, resulting in an increase in value by the time they complete the purchase.
Bridging loans are very useful tools when purchasing a property in very poor condition and non-income producing, where High Street funds will probably not be readily available. A good example is the purchase of a derelict bungalow, which has the potential for demolition and the construction of 2 or 3 modern units. As long as the worst case scenario is covered, in that the bungalow can be refurbished and sold or refinanced to repay the bridging loan, the borrower can use the bridging loan period to apply for planning. If planning is obtained then they have the option to stay with the bridging lender to complete the development funding, or alternative finance can be arranged through the High Street or a specialist development lender.
Using an experienced broker in the above circumstances can have major advantages, in ensuring that the costs and right lender balance is maintained. For example not all bridging lenders offer development finance, however in a small scheme with a short development period it could be more cost effective to stay with the same lender, even if the interest rate is higher, due to savings on valuation, legal and lenders fees.
Bridging loans can come into their own for auction purchases. Lenders have the ability to act extremely quickly, so the time constraints posed at auction are not a problem. Indeed a 14 day completion is becoming quite common and provides the luxury of knowing that you can bid safely at auction, knowing that the funds will be available on time and just as importantly with the minimum amount of fuss.
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Written by: Anthony Harrison