What To Consider Before Taking Out A Bridging Loan

Over the past few years, with a surging housing market and a demand that has surpassed all expectations, buyers have been seeking new approaches to financing their dream move or the jewel in their property portfolio.

This has led to the rise, particularly in property investment, of a range of alternative financial instruments to the typical property mortgage, including mezzanine finance for businesses and bridging loans for a wide range of different buyers.

According to the Bridging Trends report, these loans, initially designed as a short term investment property loan whilst funding is secured, are increasingly being used by residential buyers.

The key reason for this is to break a property chain, where the purchase of a property relies on the sale of another, which itself can rely on another sale and so the chain continues.

Being able to break the chain would put a buyer in a much more powerful position to get a property and close a sale faster, but before you do, here are some critical points to keep in mind.

Ensure You Have An Exit Route

Bridging loans are very popular because they are easier to get approval from, are easier and faster to apply for and the turnaround between approval and receiving funding can be a matter of days.

However, the trade-off for this is that the loans typically have shorter terms and higher interest rates, with the idea being that the money is quickly used to purchase an asset.

Before applying for money this way, make sure your exit plan is already in place as much as possible, otherwise, you run the risk of paying for the loans of two houses at the same time.

Typically for residential sales this is after the contracts have been exchanged on a sale, the property is a short-term investment in any case and will be sold quickly (such as a house flipper) or preparations are in place to refinance with a more traditional loan option.