If you’re trying to bridge the gap between two demanding payments, it’s worth considering a bridging loan. The importance of this type of finance has gained more traction now than ever in the real estate world.
As the name suggests, bridge loans can be a great way for individuals and companies to finance transactions while waiting for another to occur. This article shows how to bridge the gap between two demanding payments using bridging loans.
How Do Bridging Loans Work?
Bridge loans can also be called bridging finance. They’re short-term financial solutions to help finance new properties while waiting for others to complete. Supposing you’re planning to move into the new house of your dreams, you can utilise bridging finance to secure your new property whilst awaiting the completion of the sale of your existing home.
However, borrowers can use bridging loans for different purposes based on their unique financial situations. Ultimately, bridging loans enable developers and individuals to finance cash flow gaps and other transactions.
Whilst residential uses are commonly popular, several types of bridging loans exist in the financial market and each one works differently and appeals to some specific groups more than others. For instance, closed bridging loans come with fixed repayment dates favouring homeowners who might have exchanged contracts with a prospective buyer for their existing home sale. It gives the homeowner more assurance of generating money from the sale to finance the bridging loan repayment.
On the other hand, open bridge loans come with no fixed repayment commitment but more risk. Lenders will demand enough evidence of a borrower’s ability to repay the full loan amount in the established time.
If your bridging finance is regulated, accredited financial regulators can force you to comply with the established terms and conditions if you default. Unregulated bridging loans can exempt you from this arrangement since many borrowers opt for these loans purposefully for their businesses. Lenders can count the business as an investment property and leverage it for your loan repayment in the future.
First And Second-Charge Bridge Loans
After accepting a bridging loan, lenders can assess your property and add a charge to it. Often, these charges are issued when you owe multiple lenders. Lenders demand a solid exit strategy. The charge binds you to determine which lenders are due for payment first and the order for the other lenders to be paid. These bridging loan types come in two forms, first charge and second charge bridging loans.
The former applies if you’re the direct owner of the property or do not have mortgages on the property. In this case, lenders will demand that you prioritise the loan repayment over other financial obligations or creditors.
You can consider a second charge bridging loan if your property has a mortgage. In contrast to first charge bridging loans, you’ll have to prioritise your mortgage over the bridge loan during repayment, usually by selling the mortgaged property to pay back the full loan amount.
Will Bridging Loans Work for Me?
Bridging loans and finance may be suitable for some borrowers but may not be the right solution for others. Financial experts reveal that the best way to find out is by researching the bridging loans and discussing your requirements with specialist brokers before making your final decision.
Generally, bridging finance can afford you fast access to short-term gap financing. But not all types may suit your circumstances.