The bridging sector is extremely competitive, which is good news for borrowers. The days when bridging loans were used solely for the purposes of purchasing a new house prior to the sale of the old one are long gone. With the bridging market believed to be worth ?2.5 billion and increasing by 25% each year. We now live in a world where bridging loans can be arranged for just about any purpose, residential or commercial.
For a long time many bridging finance lenders viewed the market as a lucrative opportunity rather than focusing on the long term possibilities. As well as an absence of innovation, a lack of clarity and tortuous small print are the most common criticisms levelled at the bridging industry. In the past this left many would-be customers disillusioned and prepared to sacrifice an opportunity rather than risk paying extortionate fees on bridging loans. However times are changing and the bridging finance market is rapidly re-branding itself as a cost effective tool to help property developers and investors seize opportunities.
Winning the trust and confidence of potential customers is something that new entrants to the bridging finance market have spent a lot of time and money on. A new company launching will have invested heavily in PR and advertising to the broker community to establish a clean image.
With this increased competition the range of choice for borrowers is constantly growing. It is now possible for an individual or business with a bad credit history to pass the credit check stage and arrange a bridging loan at competitive rates and terms. Some of the more common uses of bridging finance include:
Auctions:
When purchasing property at auction the borrower usually has a deadline of 28 days to complete the process. Although it is not uncommon for borrows to be told that it is possible to complete purchase using conventional finance in practice the funding is rarely available in time. Having paid a 10% deposit it is vital that completion takes place within the deadline. This is where bridging loans are most useful, once the valuation has been received legal completion can often take place within a few days.
Buying Property at Undervalue:
Approaching a mainstream lender with a proposal to purchase a property at under value is pointless as they will only consider the purchase price. However bridging loans can be raised against the value of the property and not the purchase price. This means that theoretically it is possible to purchase a property at discount without putting any money into the deal.
Debt Relief:
Business people often get into financial difficulties due to cash-flow problems. These can be a result of trading problems or even unexpected tax demands, where there is equity in a freehold property bridging loans are an ideal solution.
Currently there is no Code of Practice, or indeed any self- regulating body to govern the activities of bridging lenders, although there have been several attempts to form one. The Council of Mortgage Lenders (CML) will accept bridging finance lenders as members, as will the National Association of Commercial Finance Brokers (NACFB) but neither organisation is geared to examine the specifics of bridging loans. Where the loan is required to assist with the purchase of a family home the Financial Services Authority (FSA) have very strict controls over who can lend money and under what terms.
One of the things to look out for with bridging loans is the practise of charging penalty interest if any payments are late. The penalty rate can more than double the original rate, so care should be taken to ensure that late payments are avoided. Again, increased competition has forced lenders to reconsider this practice, but it still exists.
Borrowers should also be aware that many bridging lenders will have a minimum loan term, usually this will be between 1 to 3 months. It is worth being aware of the exit or redemption fees as some lenders will try to increase their profits by charging excessive amounts. It is also worth keeping an eye on the legal and survey fees as these can be an opportunity for lenders to try to make more money.
Most bridging lenders are now well organised, customer focused organisations, the on-going threat of increased regulation has seen the death of some of the unsavoury business practices which means that bridging loans should continue to be a valuable tool.
Find out my about bridging loans by talking to a commercial finance broker. Spectrum Business Finance have been arranging bridging finance for over 5 years and have the experience to accommodate most circumstances.
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