Entering the property development industry isn’t easy. It demands a lot from aspiring developers, including a willingness to do thorough research, an eye for opportunities, and most importantly, a reliable method of financing a purchase. Though plenty of options are available, bridging loans are among the most popular choices for property developers.
The popularity of bridging loans is for good reason; they offer property developers a range of significant advantages, most notably speed and the ability to seize upon opportunities as they arise. However, bridging loans are not without their downsides. As such, it would be wise to know both before choosing to use them in your next project.
In this article, we will discuss the pros and cons of bridging loans, ensuring you have the information you need to make the best decision for your next project. Let’s get started.
What are bridging loans?
Bridging loans are a form of finance that acts as a short-term “bridge” between a purchase and a long-term solution. The average bridging loan lasts around 12 months, though some can exceed this timeframe. However, only a few lenders will be willing to provide a longer loan, and only up to 18-24 months. While short, this time frame usually is enough for the borrower to find a longer-term solution.
As bridging loans are a short-term form of raising finance, they specialise in both speed and flexibility. To facilitate this, bridging loans require a form of collateral, making them a type of secured loan. Borrowers will be expected to offer physical assets, such as property, as collateral for the loan. The value of this asset will be tied to the value of your loan, making it quite flexible if you have high-value assets. Because of this flexibility, and several other advantages, bridging loans have become the preferred tool of many property developers.
Also Read: What Is Alternative Finance & How Can It Be Used
The pros of bridging loans
Though speed and flexibility are the two chief pros of using bridging loans, this form of finance has a host of other advantages. Including the aforementioned two, the main pros are:
- Speed – Though we’ve mentioned this already, it’s worth considering in more detail. Bridging loans have an incredibly streamlined application process. While it requires the usual set of documents, such as identification and credit history, these are not the most important factors. Instead, the most important factor is the value of collateral assets. As such, borrowers can swiftly complete the application process, with approval and the release of funds taking as little as two days.
- Flexibility – Bridging loans can be used to purchase a wide range of properties, and even other assets, such as vehicles or land. They are also available for both commercial and private use, allowing both residential dwellings and properties intended for rent or sale to be purchased. While this is beneficial for anyone looking to buy property, this is especially useful for property developers. Development opportunities can take a wide range of forms, and having the option to purchase any property, regardless of its previous designation, is incredibly valuable.
- Adjustable repayment – Bridging loans are not only flexible in what can be purchased, but also in how repayments can be made. Lenders don’t typically ask for repayments until a few months after the funds have been released, with many opting for upfront fees and a lump sum payment at the end of the term. These terms can also often be negotiated, resulting in interest-only payments until the sale of a property. This is great for residential home purchasers, as there is no need to worry about making monthly repayments while moving house.
The cons of bridging loans
Although bridging loans are undoubtedly useful, offering some considerable advantages for any purchase, they aren’t without fault. As such, you should know the drawbacks before considering this form of finance. The main cons are:
- Expensive – While useful, bridging loans are not a cheap option. Interest rates for them tend to be a bit more expensive than alternative forms of finance, with several fees borrowers must budget for. Together, they can make the application quite expensive, much more so than many other loans.
- Loans are tied to collateral – To qualify for a bridging loan, you need to have assets of some value and equity in them. Without assets of sufficient value, your odds of a successful application are pretty low. However, this can be overcome if you can prove you have a high income, capable of making payments during the life of the loan. This is dependent on your chosen bridging loan lender, and won’t be an option for every bridging loan.
- High risk – Compared to other forms of finance, bridging loans are fairly high risk. Borrowers must provide physical assets as collateral, being of comparable value to that of the loan being applied for. Naturally, this poses quite the risk if you cannot repay your loan, as the assets you used as security will be seized in order to repay the rest of the loan. The risk climbs in conjunction with the value of the loan; purchasing a high-value property that can’t be sold as quickly as you thought is all it takes to land yourself in hot water.
Conclusion
Bridging loans can be a brilliant way to raise finance for a wide range of purchases. They can help private home buyers purchase their dream home, just as they can help property developers fund their next project. The flexibility of bridging loans, coupled with the speed at which an application can be completed, makes them quite versatile indeed, enabling anyone to seize upon opportunities as they arise.
However, although bridging loans have their pros, they have an equal number of cons, too. Bridging loans can be expensive, much more so than alternative forms of finance, and come with a larger degree of risk than a standard mortgage, for example. As such, you should carefully weigh this risk against your situation, and thoroughly research any property you intend to purchase. If you can’t repay your bridging loan, you could quickly find yourself in a difficult position. That said, bridging loans are an incredibly useful tool, provided you can effectively manage this risk.