A bridging loan can be an extremely valuable tool in property investment and finance. It can enable you to do profitable property deals that would otherwise have been impossible. For example, when you find your new dream home and want to make a purchase before the sale of your existing property, or when you’re betting on an auction property or wanting to take advantage of a seller’s discount for a quick sale. To help you make the most of this finance option, here are three useful tips if you are considering taking out a bridging loan.
Understand what bridging finance is
It is important that you understand what a bridging loan is and how it actually works when obtaining bridging finance for a residential property. A bridging loan is similar to a normal mortgage, but there are a few key differences. The major difference is that unlike a typical mortgage, bridging loans are designed to be a short-term arrangement and are typically only offered for up to 24 months. One of the main benefits of a bridging loan is the speed at which they can be obtained. A typical mortgage can take weeks and even months of lengthy, time-consuming applications and paperwork. Whereas a bridging loan can usually be approved within a few days or even hours. This allows you to take advantage of property investment deals that would otherwise be unobtainable. If you want to get more information on how a bridging loan works and what the likely costs will be, then speak to bridging loan experts to get advice.
Know the terms of the agreement
Make sure you know the terms of your agreement when applying for bridging finance for a residential property. It is important to read the contract carefully and be aware of all vital information like repayment terms, interest rates, and so on. Keep in mind that most lenders will also require you to have a clear ‘exit’ in place. This is basically how you plan on paying the loan back in full (including interest costs) within the specified agreement period. If you don’t have the funds to make the repayment, then it is possible to move the loan onto a more permanent type of finance, like a term mortgage. It is also important to be aware of any additional fees you are likely to incur when applying for bridging finance. According to Moneysupermarket.com, this may include arrangement fees, valuation fees, and an exit fee.
Find out how much you can borrow
The size of the bridging loan you can borrow depends solely on the value of the property. Unlike traditional mortgages, factors such as the amount of potential rental income and your own personal income don’t affect how much you can borrow. Generally, the value of the property will always be the lower of the property’s purchase price or the current value. However, keep in mind that some bridge loan providers will calculate what you can borrow based on just the current market value, ignoring what you paid for the property. As with any loan, it is extremely important to never borrow more than you can afford and to have a realistic plan in place to make the repayments.
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