Why Bridging Loans Aren't Suitable For Everyone

Why Bridging Loans Aren’t Suitable For Everyone

Bridging loans are short-term financial products to finance an interval between two transactions.

These loans have grown in popularity throughout the real estate sector, helping homeowners finance their way to new properties while waiting for their existing properties to sell. It’s crucial to do your due diligence before applying for bridge loans as it’s a big decision that may not be suitable for all individuals. Here’s why bridging loans aren’t suitable for everyone.

The Ins And Outs Of Bridging Loans

As its name suggests, a bridging loan helps individuals bridge funding gaps until a final transaction goes through. Understanding how these financial instruments work can be a great way to determine whether or not they’ll be the right fit for your financial needs.

Many people take bridging loans for specific purposes. Therefore, each application may vary depending on the individual’s unique challenges. However, the overarching goal is to help individuals with the funds they require in financing cash flow gaps and property deals.

Apart from financing a property while you await the proceeds of another sale, you can use bridging loans as a capital injection into your business. Applying for a standard mortgage can sometimes be daunting, especially if you want the proceeds for an ongoing auction.

Bridging loans can be your best bet if you want a quick source of funds to finance a property at auction while awaiting approval from your mortgage application. Also, bridging loans come with their requirements, pros, and cons. Experts recommend researching bridging loans before applying, especially if it’s your first time. It helps you better understand the interest rates on bridging loans and why they’re higher than long-term loans. If these details don’t resonate with your financial goals, bridging loans may not be for you.

You Need an Exit Strategy

It’s tempting to choose the shortest repayment term for your bridging loans. But that might not always be the best option due to possible delays and other construction issues.

For instance, you may default on your loan if your existing home sale is delayed. Several other issues can undercut the selling process. Generally, developers and their efforts are subject to factors like the recent COVID-19 pandemic and its effects on the global housing market.

Recently, events like Brexit presented several issues for developers in the United Kingdom and other European countries. Therefore, it’s essential to have an airtight exit strategy to make up for these possibilities when applying for bridging loans. Do well to attach defined end dates to your exit strategy to help you avoid penalties.

You Need to Have A Solid Repayment Plan

The short-term nature of bridging loans is the main characteristic differentiating it from other loan types.

Bridging lenders will require you to repay within 3 to 24 months. Outrightly, bridging loans may not be for you if you want to repay your loans over a longer period. You may apply for a term extension, arranging a longer-term finance solution. A huge part of this extension depends on your ability to repay your bridging loans within the established time. Therefore, you should be certain about your repayment ability before starting the bridging loan application process.  

Get Professional Advice

Enlist a professional broker to aid you in the loan application process. Generally, bridging loans can be a quick-fix solution to finance your property development or transaction. And trusted brokers can help you set the right financial goals and determine whether or not to opt for bridging loans.

John Norwood
John Norwood is best known as a technology journalist, currently at Ziddu where he focuses on tech startups, companies, and products.