Advantages and Disadvantages of Bridging Finance
Bridging finance has many distinct advantages that single it out from other forms of lending, although along with those product benefits certain disadvantages are also brought to bear and it is worth going through both sides.
- Speed of Decision and Delivery of Funds – Focusing on the asset rather than the applicant makes the loan process quick. No other form of finance (barring unsecured loans) can be put into place this quickly. The main reason for this speed is that the underwriting process is centred on the security rather than lender status and many of the issues that have to be satisfied for status lending can almost be ignored. When the respective solicitors work quickly on the legal and title issues then the loan can potentially be in place in a matter of days. For the keenest rate products as “short-term loans” the borrower will be assessed and this makes the time taken to put the better rate products into place longer than with the non-status loans.
- Availability – In many instances the borrower is unable to get any other form of finance for their specific requirement other than a bridging loan. Properties that are not mortgage-able may only be able to be used as security with a bridging loan.
- Flexibility – Linked to the above reason, certain projects where the security is dilapidated or part built (although still with a recognized value) may be used as security with bridging finance when clearly a conventional Mortgage lender would not accept the same.
- Potentially Lower Application Costs – In many instances the client will only have to pay for a valuation prior to taking possession of the funds making the application process inexpensive. Lenders arrangement fees and in some cases the legal fees can be added to the loan if necessary.
- Exit fees can be minimal and the loan can be structured so that as soon as the money is available to repay the loan no further interest payments are accrued. This makes it cheaper than a potentially available long-term mortgage product whose exit fees could make it more expensive even when the overall rate per annum is cheaper.
- Higher LTV – In some cases a bridging loan will be underwritten against an asset’s true value (Open Market Value) rather than the purchase price. In those genuine UMV purchases, for example when a company is buying their commercial property at a discount from the current freeholder, this is a genuine advantage and can sometimes secure 100% of the purchase price.
- The product is expensive and short-term. Bridging rates can be anything between 7.5% and 24% flat rate per annum alongside the additional professional – legal and valuation fees. It is also uncommon for an initial bridging loan agreement to be put into place for anything over 18 months.
- Repossession Threat – If the loan goes to term the threat of repossession of the asset exists. Although certain lenders may put into place a re-loan particularly if the initial LTV is low some lenders will commence repossession proceedings the day the loan goes into default.
- Ability to Refinance as Safety Net – Without a strong exit strategy bridging lenders will not make funds available, future hope of sale may not be a sufficiently strong repayment strategy unless you can demonstrate a strong local property market. Even where the borrower hopes to sell the asset to repay the loan the possibility of a refinance may be sought as a safety net.