The truth behind four common bridging myths

Bridging lending grew by 15% last year alone, according to member data from Association of Short Term Lenders, and it was driven by increasing demand from borrowers for flexible short-term funding.

Related topics:  Blogs
Marcus Dussard | Castle Trust
17th July 2019
Marcus Dussard Castle Trust
"The market has evolved significantly in recent years to become more aligned with other areas of secured lending, with greater transparency and clarity."

How many other sectors of our market have experienced this type of growth in a relatively flat environment? And, if you don’t already advise your clients on bridging finance, what are you waiting for?

Despite the growth in the popularity of bridging finance, some myths still prevail about the sector. So, what’s the truth behind some of the most common bridging myths?

Myth: The main use of bridging finance is to save broken chains

Truth: It is true that this is a use of a bridging loan. Bridging finance is a short-term mortgage secured against property or land that is used to ‘bridge’ the gap, until longer term finance can be arranged, or the underlying security is sold – and so one use is to bridge the gap between property transactions.

But often the purpose of bridging finance is to bridge a criteria gap, providing flexible finance where longer-term lenders are unable to help because the process takes too long, or the security is unmortgageable. Three common examples include auction finance, property refurbishment and development exit loans. Another purpose is to for clients who are looking to release equity for cash flow purposes on a short-term basis, for business use for example.

Bridging finance is available secured on a first or second charge basis on residential, commercial and semi-commercial property as well as land.

Myth: A bridging loan is a last resort

Truth: Bridging can be a useful tool when other avenues have failed, because it offers speed and flexibility, but these attributes are more commonly harnessed by savvy investors and business owners who recognise the benefits of fast access to flexible finance as a means of leveraging their capital. Bridging finance can also provide the option to roll-up some or all of the interest and this means it can be used to manage cash flow, which opens the door to a lot of other uses, including structuring loans that fit the ICR on buy to let properties.

Myth: Bridging lending is expensive

Truth: Bridging is a tool that enables investors and business owners to leverage their capital and fund investments and, in doing this, it can help to create wealth. For example, a bridging loan to fund a refurbishment project may have a total cost of £50,000 for the borrower but could increase the capital value of the property by £100,000 and so the borrower benefits from a net gain. The thing to remember is that bridging is short-term funding and so can be inefficient when taken over a longer period.

Myth: Bridging lending is complicated

Truth: The bridging landscape may seem unfamiliar at first, but the market has evolved significantly in recent years to become more aligned with other areas of secured lending, with greater transparency and clarity. If you have any questions, about how a product works or what it can offer to your clients, speak to a lender BDM who will be able to help.

The key for any bridging loan is to be clear about the exit strategy. This would usually be via a refinance onto a longer-term product, the sale of the property, or a possible combination of both if additional securities have been offered as part of the loan structure.

More like this
Latest from Property Reporter
Latest from Protection Reporter
CLOSE
Subscribe
to our newsletter

Join a community of over 30,000 intermediaries and keep up-to-date with industry news and upcoming events via our newsletter.