4 Common Misconceptions About Bridging Loans
Some bridging loan myths are more misleading and potentially damaging than others. Even so, anything that paints an inaccurate picture about bridging finance could prompt prospective borrowers to reconsider their applications.
In an attempt to shed light on some of the most widespread misconceptions of all, here are four common myths about bridging loans (and the respective truths behind them):
1 – Bridging Loans Are Disproportionately Expensive
This myth stems from the fact that interest on bridging finance accrues on a monthly basis. If a bridging loan was to be taken out over several years, it would indeed become impossibly expensive. But this completely ignores the fact that bridging finance is by its nature a strictly short-term facility. Most bridging loans are repaid within a few months, with interest payable at a rate of around 0.5% per month.
Where bridging loans are repaid promptly, they can be more cost-effective than any comparable facility available. However, bridging finance should never be taken out with mid-term or long-term repayment in mind.
2 – Bridging Finance is a High-Risk Product
The risks that apply with bridging finance are no different to those of any other secured loan. Bridging loan specialists are meticulous in their application screening processes in order to ensure they only lend to appropriately qualified customers. Bridging finance is secured against assets of value, in the same way as any conventional secured facility. This means that the borrower’s assets are at risk of repossession, in the case of non-repayment.
But as bridging finance is issued exclusively upon the provision of evidence of a workable exit strategy, this is a highly unlikely outcome. If anything, the strictly short-term nature of bridging finance can make it a safer product than a conventional long-term secured loan, which calls for an indefinite commitment.
3 – Bridging Finance Is Only Useful for Purchasing Property
The flexibility of bridging finance goes beyond that of almost any comparable product. Where a bridging loan is authorised, the funds can be used for almost any legal purpose whatsoever. It just so happens that purchasing properties is the single most common use for bridging loans, among private customers and commercial borrowers alike. But it is far from the only purpose for which bridging loans can be used.
Other customers use bridging finance for purchasing high-value items at auction, for the renovation and restoration of properties, for conducting home improvements before listing them for sale, for purchasing essential business equipment and more. They can also be great for covering time-critical costs in a hurry, such as urgent repairs or unexpected tax bills.
4 – Arranging Bridging Finance is Complex and Time-Consuming
Bridging finance is designed to pick up where conventional mortgages and secured commercial loans leave off. It currently takes in the region of 12 weeks to underwrite and authorise a standard mortgage. By contrast, a bridging loan of the same value taken out for any purpose can be arranged and accessed within a few working days.
Bridging loans are designed to provide applicants with quick and convenient access to significant sums of money in time-pressing situations. In less than two weeks, almost any amount of money can be accessed (subject to the value of the security provided) and used for any legal purpose. Organising a bridging loan can therefore be quicker and easier than arranging any comparable loan, particularly for applicants with imperfections in their credit history.
For more information on any of the above or to discuss the benefits of bridging finance in more detail, contact a member of the team at UK Property Finance today.