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5 things you need to consider before taking out a bridging loan

Bridging loans have surged in popularity as versatile short-term financing solutions, ideal for bridging financial gaps between big transactions.

When considering this typically more expensive financing option, it is essential to take a step back and consider all factors including rates, exit strategy, viable alternatives and more.

1. Understand High Interest Rates

Those contemplating a bridging loan must recognise the reality of high interest rates, which, although justified by the loan’s flexibility and speed, can significantly impact the overall cost.

Their unique nature necessitates premiums. Typically, these rates are higher than conventional mortgage rates. Lenders impose them due to the short-term, high-risk nature of the loans.

Borrowers thus must be prepared for the financial implications and conduct thorough evaluations to avoid any unforeseen financial strains.

Ultimately, the key lies in understanding that a bridging loan, while helpful, requires careful financial planning. To aid you in this planning task, we have a free bridging loan calculator that can take the guesswork out of your calculations.

2. Assess Loan-to-Value Ratio

Crucial to the decision-making process is evaluating the bridging loan loan-to-value (LTV) ratio, as it significantly influences the loan’s feasibility and risk.

In 2016, regulatory authorities, aiming to streamline financial operations, emphasised the importance of maintaining a healthy LTV ratio, which typically ranges between 60% and 75%.

A higher LTV ratio indicates that one is borrowing a substantial amount of the property's value, which directly affects not only the loan's interest rates but also approval chances since the lender's perceived risk is much higher.

Therefore, you should assess the property's value meticulously and consult with financial experts to ensure the LTV ratio remains within a manageable and favourable range, consequently mitigating potential risks.

An optimal LTV ratio (higher bridging loan deposit) not only boosts the likelihood of securing a loan but also fosters stronger negotiation power, yielding more advantageous terms.

Remember, keep your Loan-to-value rate higher than you typically would on a mortgage. The rates are higher and the term is shorter.

3. Plan Your Bridging Loan Exit Strategy

Meticulously planning a strategy for exiting a bridging loan promptly and efficiently is crucial.

One commonly adopted strategy involves refinancing the bridging loan with a longer-term mortgage once the short-term needs are resolved. This requires thorough research, appropriate timing, and proactive measures to secure favourable terms.

Furthermore, selling the initial property to repay the bridging loan can be a feasible option if it aligns with long-term objectives and market conditions. Therefore, it is essential to maintain a flexible and adaptable mindset, preparing for various scenarios that might unfold. This ensures a smooth and timely exit, safeguarding financial stability.

Our recommendation would be to over-plan. The default rate on bridging loans is estimated to be much higher than traditional mortgages, due to the nature of the loan. For this reason, over-planning your exit strategy and potential setbacks is essential.

4. Explore Alternatives to Bridging Loans

While bridging loans are advantageous for specific circumstances, exploring bridging loan alternatives is crucial.

Even if there aren't any that suit your needs, taking the time to investigate other options is worthwhile due to the high costs associated with bridging loans. Examining the various possibilities makes for more informed decision-making.

Traditional borrowing methods such as mortgages, personal loans, or business loans will offer more favourable terms and lower interest rates compared to bridging finance.

Additionally, assessing peer-to-peer lending or negotiating vendor finance might reveal opportunities to fund one’s endeavours without the higher costs associated with bridging loans.

If you're taking on a property development of some kind looking into, refurbishment loans, development exit loans and others is worth considering.

By remaining open-minded and thorough in researching these alternatives, individuals can make savvy decisions that increase their chances of long-term financial health.

5. Consider Using a Bridging Loan Broker

Navigating the complex world of bridging finance can be daunting due to the high costs and sea of lenders available. Hence, engaging a professional broker can significantly smooth the process.

A broker offers expert insights and can identify the most suitable loan products for your situation.

Moreover, brokers typically have access to exclusive deals and lenders (some of whom work exclusively with intermediaries) not available to the general public.

This access helps secure favourable terms that might be otherwise overlooked, enhancing one’s financial advantage.

Utilising a broker can save time and effort, untangling the intricacies of loan applications while ensuring compliance with regulatory frameworks and due diligence.

Ultimately, the use of a broker isn't just about convenience. Their seasoned expertise provides confidence and clarity in making astute financial decisions.

Whilst this broker benefit is great, the primary reason to consider using a broker is to secure lower bridging loan rates and fees. Bridging loans are notoriously expensive, and this is their biggest drawback. Therefore, using a broker to find the best available rate seems essential for minimising costs and maximising financial efficiency.

Finance Nation

If you're ready to explore bridging finance options, you're already in the right place.

Our experienced team understands the challenges faced by businesses, sole traders and developers that seek the most time and cost-effective solutions. We're here to assist you.

Utilising our cutting-edge Fintech platform, we can provide you with seamless access to tailored finance solutions that meet your specific needs.

With access to exclusive lending products you might not find elsewhere, we will identify the best deal for you and ensure the process runs smoothly until the funds are where they need to be.