What Are The Pros And Cons of Bridging Finance?
Selling your home and purchasing a new property simultaneously can be problematic. This is because it might take time to sell your existing property. However, if you take out bridging loans, you can easily bypass the hassle of matching up settlement dates, move quickly to purchase your new home and offer yourself some more time to sell the existing property.
So, what is bridging finance? Well, bridging loans is nothing but a short-term funding alternative that assists you to purchase a new home before selling the existing one. A bridging loan can be valuable if you require borrowing money for a short period. It can assist in bridging the gap if you wish to purchase a new property before selling your existing one. Besides, it is also helpful if you buy a new home at auction, where you will require the money instantly but might not have sold your old property yet. Due to these benefits, many people opt for this financing instead of a first mortgage or second mortgage.
So, you have got some idea about bridging loans. But do you know how it works? The answer is no in most cases. This type of funding usually has similar requirements as a standard mortgage, like first or 2nd mortgages. It means you should have some equity in your home to qualify for this type of loan. For instance, if you have a home that has a value of $500,000 but still has $300,000 left on its mortgage, you will have $200,000 in equity. Depending on the lender you select, the bridge loan term will last six to twelve months. You will get maximum lenders that can offer you bridge loans and never go higher than a loan-to-value ratio of 75%. It indicates that you will have to have more than 25% equity to be eligible to get bridging loans.
The pros and cons of bridging loans
As a borrower of a first mortgage, second mortgage, or bridging loan, you might have specific requirements. As a result, you should know the bridging loans’ pros and cons. In this article, we have provided an overview of the most common bridging loans benefits and drawbacks. So, let us start the explanation without further delay.
Pros of Bridging Loans
Below are some of the most notable benefits of bridging funding.
Quick Process
The application, approval, and funding process of bridging finance are faster compared to many loan types. When you apply for it, you will receive the money quickly and use it to buy equipment machinery, pay for inventory, recruit new staff, or meet payroll. Therefore, it is one of the key reasons people select this kind of financing in today’s era.
Full Ownership
You can obtain funding from different funding options like the first mortgage. However, some loan types restrict you to get complete control of your business. It means you have to work with the lender and operate your business. But if you take out bridging loans, you will obtain complete control over your business operation.
As this type of financing is a short-term funding solution, you do not need to turn to partners. As a result, you can maintain control of your business as much as possible. Hence, it is another significant benefit of bridging loans helping you run and expand your business smoothly.
Monthly Repayment Levels
You have to pay back the bridging loans on a capitalised basis. It indicates that the cost is added to the entire loan amount. It is simpler and more affordable for businesses concerned about ongoing cash flow.
Flexibility of Usage
While 2nd mortgages and other mortgage loans are generally available for a residential property, bridging loans can be used to refurbish your business premises, land deals, and even construction projects where nothing has been constructed yet. Hence, it is one of the reasons why people prefer to opt for this type of financing. After all, you will not get such usage flexibility in other loan alternatives.
Free of Exit Fees
Most bridging loan lenders prefer to make their money via interest rates and other establishment fees. As a result of this, if you select the best lender, there may not be any costly exit fees. Due to this, you can save some money if you take out this kind of loan.
Repayment Flexibility
When you take out funding from bridging loans, you can make structured repayments. It means you can make repayments that suit your needs with either capitalised costs or monthly repayments.
Cons of Bridging Loans
Bridging finance also includes some downsides which are mentioned below.
Higher Interest Rates And Additional Fees
You need to pay higher interest rates if you take out such loans. Besides this, the lender often includes broker fees, establishment fees, valuation fees, and legal fees.
Larger Payments
Bridging loan terms range from 1 to 12 months. As a result of this, you need to make larger repayments. It is a drawback if you have a lot of cash to make the repayments. Besides, if you miss or are late on your repayments, you might have to pay frustrating penalties.
Risky
Bridging loans are risky as you have a lot of pressure to sell your existing property. If you sell your home for less than you anticipated, you might have to take out another mortgage loan on your new home. Hence, it is one of the biggest drawbacks of bridging finance.
Two Valuations Payment
When you take out a bridging loan, you need to pay for your current home and the newly purchased one. These two valuation payments are challenging if you do not have adequate cash flow.
Final Takeaway
While wrapping up, we can say that these pros and cons are enough to determine why more homeowners are opting for bridging loans than 2nd mortgages or any other funding alternatives. Depending on the situation and requirement, give a bridging loan a try. Who knows, you might be able to take advance of a great business opportunity.