When should a developer or investor consider a bridging loan?
Across the UK, more property investors and developers than ever before are choosing bridging loans as a form of short-term property development finance. One of the most prevalent borrowing trends within the sector over the past couple of years, the lowest ever bridging loan rates are attracting investors and developers in record numbers.
As with all types of property development finance, it is important to understand when a bridging loan is an appropriate and viable option. Typically, accessible within a matter of days or weeks and repayable in 6 to 12 months, bridging finance is ideal when time is a factor. The majority of bridging loan specialists impose no upper limits on how much can be borrowed, as long as the applicant has sufficient security to cover the loan.
Bridging finance, a strictly short-term option
Perhaps the most important consideration of all when opting for bridging finance is the short-term nature of the loan. When an application for a bridging loan is formalised, the lender and borrower agree on a specific date for full repayment of the outstanding balance. This typically includes the loan, the agreed rate of interest and additional borrowing costs – all to be repaid in one lump-sum payment on or before a predetermined date.
This means that the developer or investor must have a viable exit strategy? in place. Typical exit strategies include selling the property against which the loan was secured to repay the balance in full or switching to a longer-term property loan (or mortgage) to spread the repayments over a longer period.
Bridging loans can be exceptionally cost-effective when repaid as quickly as possible, in accordance with the terms and conditions of the agreement. They are also among the fastest lending facilities on the market – particularly given the large sums available.
When is the best time to consider a bridging loan?
The potential uses for a bridging loan are vast, with very few restrictions imposed by the lender. For property developers and investors, instances where bridging finance is considered appropriate include the following:
Purchasing properties at auction for significantly less than their market value when full payment needs to be provided quickly.
Taking advantage of time-limited investment opportunities to extend a property portfolio – a popular option among buy-to-let property investors.
Covering major or urgent property development, improvement and renovation projects ahead of selling or letting out the property.
Meeting important tax obligations or covering urgent business expenses during temporary financial shortfalls, in order to avoid penalties.
Carrying out emergency repairs of existing properties, which may occur at any time and need to be addressed immediately.
Getting a new property development or investment venture off the ground in the first place by securing capital against one or more properties already owned.
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