One of the most popular reasons for taking out bridging finance is to maintain one's place in a property sale chain.
If you have found a new house and are keen to secure it but cannot until your current abode has sold, a bridging loan can provide you with the cash you need.
Likewise, if you have identified a plot of land you think has the potential to be developed into a block of flats or a cottage that with a bit of work could sell for a tidy profit, a bridging loan could be the answer.
If you do intend to apply for a bridging loan to fund your property dreams, there are various points you need to consider before you borrow the money and it is important that you understand what you are getting into.
In the case of maintaining your place in a property chain, taking out bridging finance can be risky in the current economic climate and could see you repaying significantly more than you borrowed in the first place.
Most bridging loan companies will lend you the money and expect it back within 12 months.
This gives you one year to sell your property and meet the terms of your original agreement, however, that could prove difficult in the current economic climate.
Since the economic downturn took hold in 2008, property prices have fallen in most parts of the UK and transaction volumes are down historically.
Added to this is restricted mortgage finance, particularly for first-time buyers.
All of this means that the housing market is going through some difficult times, meaning a 12-month window may not be long enough for you to sell your property and repay your bridging loan as you had planned.
While many firms will extend the repayment period, this could leave you in a difficult financial position.
Bridging loan interest rates tend to be higher than those imposed by banks on traditional loans. This is because bridging loan companies are exposed to greater risks and therefore charge more for you to borrow.
What this higher rate of interest means is that you may have to pay back significantly more than you initially borrowed – a situation that will only get worse the longer it takes you to sell your home.
If such a situation escalates you may have to find a significant sum on top of the money raised from your home, which could lead to several problems.
The same is true if you have ambitions as a developer. The cottage you redevelop or flats you build may struggle to sell for the price you are asking or may not sell at all and the longer this situation persists, the more you will have to repay.
If you are in a position where you have exchanged contracts on your house and are just waiting for the finer details to be concluded, then the situation is not as risky.
As few deals collapse once contracts have been exchanged, taking out a bridging loan in the mean time can make sense, as it will allow you to buy your new home safe in the knowledge that your existing abode will be sold in a matter of weeks or months.
Taking out a bridging loan will always carry an element of risk, particularly in the current economic climate.
Before applying for bridging finance, it is important to plan for every eventuality to ensure you do not slip into a debt spiral.
Raising the money you need to start a business can be hard, however, there are alternatives to bank loans. Among them are bridging loans, peer-to-peer lending and borrowing money from friends and family, meaning you need to do plenty of research.
Before taking out a bridging loan, you must understand a number of key points. These include the rate of interest you will be charged, the length of time you have to repay the loan and whether there are any arrangement fees that apply.
You should only consider bridging finance if your funding needs are temporary. This is because the high rates of interest make bridging finance unsuitable as a long-term solution, so if you have long-term needs, you should look at other options.
Both banks and specialist bridging loan companies can provide the bridging finance you need, meaning you need to compare products from a range of providers. You need to look at factors such as interest rates and arrangement fees.
Some bridging loan companies will lend up to £5 million if you have sufficient equity in your home, however, what if your borrowing needs are more modest? If you need a sum of £10,000, bridging loans can still be an option.
As we head into a New Year we take a look at the expert predictions for what areas will provide likely success in the stock market over the next 12 months.
The first part of our in-depth analysis of what will happen to the UK economy in 2013 focuses on monetary policy. What will happen to inflation, interest rates and GDP in 2013?
The Chancellor has to juggle the numbers in his Autumn Statement to keep the deficit down whilst stimulating economic growth with infrastructure investment. How will he do it?
Students face a daunting financial legacy at the end of their studies. Find out how you can help as a parent.
If you are dreading your next credit card bill after living it up over Christmas then take control of your finances and find the cheapest method to pay off your debts.
The New Year is a good time to review your pension provisions. Pensions experts McCarthy & Stone run through ten expert tips to help you take control of your future.
George Osborne will announce his highly anticipated Autumn Statement tomorrow as he tries to find ways to boost the economy without adding to the government debt.
George Osborne has rejected calls from IMF Chief Economist Olivier Blanchard to change tack in the March budget and focus more on growth than austerity measures.
Latest Company Articles
- What the new state pension system means for your retirement
- How to arrange finance for an overseas property purchase
- Tips for contractors to prepare for a tax inspection
- A look back at 2012 for IT contractors
- Equity release: don't leave retirement funds down to luck
- 5 financial resolutions to make for 2013
- Don't suffer in silence – get help for your debt problems
- How equity release can help cover the costs of social and healthcare
- How to find out more about equity release schemes
- What can you spend your money on after releasing equity?