Bridging loans can provide a useful source of financing to help purchase property quickly or access funds before selling an existing property. However, bridging loans also come with considerable risks that need careful evaluation.

This article will dive into the main benefits and opportunities bridging loans can offer but also critically examine the risks to be aware of.

By the end, you’ll have a balanced perspective from which to base your decision.

Let’s examine the key considerations.

Compare market-leading bridging loan quotes with no obligation

  • Loans from £20,000 to £30m plus
  • Max 75% LTV first charge 70% second charge
  • Secured on Residential and Commercial property
  • Adverse credit considered
  • Both Regulated and Non-Regulated Bridging Loans

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What are the Risks of Bridging Loans?

Payment Arrears

As with any loan, become unable to keep up to date with repayments is perhaps the most serious risk. This is especially the case with bridging as the interest rates are relatively high, as befits the short-term nature of the finance.

Bridging loans typically have much higher interest rates compared to traditional mortgages. Rates of 10-12% are common. This can make the overall cost of the loan exponentially higher, especially if it extends close to the maximum term.

Defaulting

Since all bridging finance is secured, defaulting on the loan is going to put your asset at risk. Creditors have a variety of legal options are their disposal to compel you to pay, which include county court judgements, statutory demand letters and ultimately, a winding up petition which could force your company into liquidation.

If you are unable to repay the bridging loan after the term, either through refinancing or selling the property, the lender can begin repossession procedures. This can lead to losing the property altogether.

Exit Strategy Failure

Since bridging finance is a loan intended to cover the space between two clear points, the exit strategy is essential to the process.

Usually, this is the selling of a property, and where the sale falls through – for whatever reason – bridging lenders can find themselves caught between a rock and a hard place.

The failure of the exit strategy is also worth considering because selling a property depends upon factors outside of your control, such as the state of the housing market.

Whatever your exit strategy is, it would be wise to consider a contingency plan should that situation arise, which may involve extending the finance. Correctly planned finance always factors in enough financial space for whatever eventuality arises.

Breaching the Terms of Your Bridging Loan

It’s worth stating that commercial bridging finance is, as yet, unregulated in the UK, and this means that lenders are at liberty to insert their own terms and conditions. You need to read the fine print carefully before signing on the dotted line to understand the fees, payments and charges and when they’re due.

You also need to understand the loan’s agreed terms and ensure you do not breach them. Many lenders prohibit renting a property while it is waiting to be sold, for example, so borrowers who choose to rent their property without realising it might risk property repossession.

How to Minimise the Risks of a Bridging Loan?

While bridging loans presents substantial risks, you can take steps to reduce the chances of running into trouble:

  • Have a clear exit strategy – Going into a bridging loan, you need a concrete and viable plan for repaying the loan in full by the end of the term. This could involve securing a mortgage, selling the property, or accessing other funds.
  • Seek professional advice – Consult with financial and legal experts familiar with bridging loans to evaluate products and terms. They can help structure loans to match your situation.
  • Carefully consider costs and ability to repay – Don’t rely on best-case scenarios. Do calculations based on the maximum interest and fees to know the costs in a worst-case scenario. Only borrow what you know you can repay.
  • Build in contingency time – When setting repayment dates, add extra time as a buffer. This provides flexibility if closing on a property sale or securing a mortgage takes longer than anticipated.

Having experienced guidance and planning for uncertainties will help minimize the chances of ending up in financial distress with bridging loans. Don’t rely on best-case assumptions.

To Minimise Risks, Check the Fine Print

Perhaps the biggest risk with bridging finance is to enter into an agreement that may hold surprises for you. Since many people seek bridging loans in a state of urgency, perhaps chasing a particular property deal, it can be too easy to race through the process without doing your due diligence.

Our suggestion is to take professional advice, and ensure that any document you are signing is clear, transparent and understood.

Frequently Asked Questions (FAQs)

What happens if I miss a payment on my bridging loan?

Can I lose my property if I fail to repay my bridging loan?

Should I rely on being approved for a mortgage to repay my bridging loan?

How can I avoid huge interest costs with a bridging loan?