While bridging loans can be very useful financial tools to help you increase your wealth, they aren’t a good choice in all circumstances. They suffer from a couple of drawbacks when compared against standard loans or mortgages, in that they usually have higher interest rates and have inflexible payment terms but at the same time work very well if being used as their name describes – as a bridge to long-term finance. Here’s a few situations in which bridging loans will be your best option for financing.
Flipping properties – If you are in the business of buying run down properties to do them up and sell them on, then bridging loans can help you out a great deal! When buying a new property, a bridging loan can be taken out against the property itself and pay for the renovation on it. That way all you need is the initial payment for the property to buy it up, then the bridging loan can pay for the renovation or re-planning, the property can then be sold on to a new owner and the loan can be paid off with that sale. Of course you will have to crunch a lot of numbers and figure out if the deal would be feasible and bring you some profit after all is said and done, but this is the secret to many in the industry working on multiple properties at once! Of course, the same can also be done if you’re buying to let, and even pay to turn a family household into a HMO.
When buying a property at auction – If you are at an auction and have seen a great deal on a property, but don’t yet have the money for it, you can use a bridging loan to buy the property outright, while you secure a long term deal on finance. This can be a risky move to make if you aren’t sure about being able to gain finances in the long-term, or if you don’t have any other assets. If you do have cash tied up in other assets however, and just need liquid cash for the purchase, then they can be a great way to do that!
Getting on the property ladder – A bridging loan can also be a great way to get hold of your first property or new home! You can either use a bridging loan to pay for a run-down property at auction and then use the money you would have spent on a deposit for a mortgage to start renovating it, or you can do it the other way around, and pay for the deposit, then use the bridging loan to pay for a renovation on the property to turn it into a home!
Buying an uninhabitable home – Often, lenders won’t finance properties they think are “unmortgagable”, which will be properties without a useable kitchen or bathroom, worth under £50,000, derelict or with structural issues. The good news is that bridging loans can be financed against them as long as you have other assets you’re also able to back against it! This means if you’re buying a property in order to develop it, you can use a bridging loan to buy and renovate it, then place a mortgage on it once the loan is paid off!
Hopefully this post has given you some idea on whether a bridging loan would be suitable for your circumstance! The important thing to bear in mind is that bridging loans are best used when they are financing a property or land that you’re looking to improve and you have an exit strategy in place with. Never take risks with them or using them to buy a depreciating asset as you’ll ruin your position and perhaps your credit rating and long-term wealth!