The pros and cons of bridging loans

Flexibility, rapid fund allocation and a bespoke approach are key differentiation from the high street.

Flexibility, rapid fund allocation and a bespoke approach are key differentiators between the high street and specialist short-term lenders.

“Short-term finance companies will look far more closely at a borrower’s circumstances,” declares Michael Kennedy, CEO of Only Bridging Loans.

“Decisions do not hinge on computer-generated credit scores and rigid, inflexible criteria.”

Although they are still mainly used by professional, more experienced property investors and landlords, bridging loans have become more mainstream in recent years given the excessive caution shown by high street lenders.

Danny Waters, CEO of Enterprise Finance, adds that the strongest quality of the bridging loan is its speed. “In some cases, loans of several million pounds have been delivered in as little as 48 hours.”

But as David Kinane, partner at Paxton Private Finance, points out, while bridging loans are designed to provide an immediate solution and so tend to complete more quickly and typically have less onerous borrower underwriting criteria, this speed and convenience comes at a price.

That being said – and although they continue to be more expensive than standard term mortgages and other sources of finance – bridging loans these days are much cheaper than they were pre-crash.

“Pre-crash, bridges were typically 1.5 per cent per month, but these days they can be half that,” notes Mr Waters.

He adds: “With bridging loans, it is less about the cost than the speed with which the loans can be arranged. The interest rates, which can be off-putting to the uninitiated, are often hypothetical as bridging loans are rarely held for a year.”

Mr Samuels admits the main danger in entering into a bridging loan is a client receives poor advice and does not properly understand the terms of the loan nor have an appropriate exit in place.

“Where brokers need to be careful,” advises Rob Jupp, chief executive officer of Brightstar Financial, “is with clients who are desperate for finance and think bridging loans are the answer.

“A bridging loan is a short-term expedient only and will be very expensive if used as a substitute for longer term funding. The main issue is allowing a client to get into a situation where the relatively high cost of borrowing overcomes the flexibility and immediacy of the bridging facility.”

In a nutshell, these loans are a very useful means of raising money quickly for any purpose, provided there is only a short-term need.

 

 

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