Thursday, May 30, 2024

Debunking 5 Bridging Loan Myths

Many years ago, bridging finance had a less than ideal reputation and many people believed bridging loans to be expensive and a facility that you only took out when you had no other options.

However, the bridging industry has grown massively in recent years as more lenders and brokers join the market and more borrowers begin to realise the potential and opportunities that bridging can offer.

Here are five bridging loans myths, debunked.

Myth 1: ‘A bridging loan should only be used as a last resort’

It’s true that bridging finance can be a useful facility when other avenues have failed, however, bridging is now often recognised by savvy property investors and business owners as a valuable primary option for fast and flexible finance.

Also, with bridging, no monthly repayments are required so it can suit borrowers who need to manage cash flow issues, and it’s also a good option for people with a poor credit history.

Myth 2: ‘Bridging finance is expensive’

It’s important to remember that bridging finance is a short-term funding option, so it can be inefficient if you need long-term borrowing. Bridging loans are intended to ‘bridge’ a temporary gap in finances before cash becomes available or a long-term facility can be arranged. So, the interest rates reflect this.

But, bridging can actually be used to make money by both home owners and property investors. For example, a bridging loan to fund home improvements may cost you around £50,000 in total (including fees and interest), but increase the value of your home by £75,000 – £100,000 before selling. This means that, yes you will have to pay upfront, but you will make a profit in the long run.

Before taking out a bridging loan, it is a good idea to get an estimate of how much a facility will cost by using a free bridging loan calculator. This will give you a good indication of the fees and interest that will be applied to the loan.

Myth 3: ‘Bridging loans are not safe’

Bridging loans are a perfectly safe form of funding as all bridging loan brokers and lenders are required to be authorised and regulated by the FCA. You can check that the lender and/or broker that you’re using is authorised by looking them up on the FCA’s Financial Services Register.

A regulated bridging loan, when the loan is secured against your home, is subjected to the same regulation as a residential mortgage.

Myth 4: ‘Bridging can only be used to purchase a property’

This myth is entirely untrue. Bridging finance can be used for any reasonable and legal purpose, it just needs to be secured against a property, or sometimes a luxury asset.

Other common uses for bridging include:

  • Home improvements and property development
  • Paying tax bills or other debts
  • Dealing with inheritance and probate issues
  • Business investment and projects
  • Stopping property repossessions
  • Asset acquisition

Myth 5: ‘You need a good credit rating to get a bridging loan’

Bridging finance is not income assessed as you do not make any monthly repayments. Instead, you will have a secure exit strategy in place (usually property sale or refinance) which is outlined before you take out the loan.

So, as long as there is sufficient equity in your property and you have a watertight exit strategy, bridging finance is available to you even if you have poor credit history.

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