Financial decisions made in the past can significantly impact the future. Several techniques and tools are available to improve your financial situation, and bridging finance is a popular choice.
Bridging finance can be used for a variety of purposes, such as purchasing a new property before selling an old one, refinancing a business to maintain cash flow, or developing a property from scratch. By taking advantage of gap financing, you can enjoy several benefits, which is why people borrowed around £214 million in the third quarter of 2022.
To make informed decisions and improve your financial status, it’s crucial to understand the advantages of regulated bridging loans. In this article we will describe bridging loan benefits that you must know.
What Are Bridging Loans?
Bridging finance can be difficult to understand because of the technical terms used to define it. Simply put, a bridging loan UK is a short-term loan provided by specialised lenders to purchase a property or fund a project before you receive payment. It allows you to repay the loan through the proceeds from selling your property or investment returns.
Bridging finance is an effective way to stay ahead of competitors and address your financial gaps. However, it is important to remember that commercial and residential bridging loans require collateral, which means you must be able to repay the loan on time to avoid losing your property.
While some people consider bridging finance an expensive lending option due to the interest rates and payment schedules, the benefits of gap financing outweigh the cost. Compared to mortgages, bridging loans have a higher cost. The average monthly interest rate in the third quarter of 2022 was 0.73%, but the benefits of bridging finance make it a worthwhile investment.
How Does Bridging Loan Work?
Given the current economic situation in the UK, quick access to funds is crucial for businesses. Inflation is rising rapidly, and companies must act promptly to avoid being impacted by increasing prices. In this scenario, a bridging loan can be suitable for those who want to stay ahead of the curve.
When applying for a fast bridging loan, borrowers can request a fixed amount from specialized or peer-to-peer lending platforms. The loan amount can range from a few hundred pounds to as much as £10 million. To secure the loan, borrowers must provide collateral such as a house or other property.
Traditional lending markets often involve complex terms and conditions, with income evaluation being a crucial factor for mortgage loans. In contrast, P2P lending and bridging finance are collateral-based, making them easier to obtain. Lenders assess the equity in the collateral and offer loans based on agreed-upon terms.
The loan-to-value (LTV) percentage is an essential factor in bridging loans. Lenders prefer a higher LTV percentage for property values, and the percentage of the loan amount is based on the valuation process. For instance, if the property value is £100 million, the lender assesses the borrower’s credit history and repayment capability to provide a major chunk of the money as a loan. Typically, bridging loans have an LTV of 75%, but in some cases, borrowers may obtain a higher LTV percentage. Thus, there is no hard and fast rule for the loan amount.
What Benefits Can You Get from Bridging Loans?
Bridging loans offer numerous benefits to borrowers. Here are some of the key advantages of gap financing.
Quick Access to Money
If your business encounters a payment crisis and needs to keep its cash flowing to sustain it, you can turn to a bridging lender for instant financing. Additionally, if you want to purchase a high-demand property, you can use a bridging loan to secure the deal before anyone else. Bridging loans are an ideal quick financing option for your business and financial needs.
Buying Property at Auction
Periodically, old estates and houses are auctioned by property owners in the UK. These properties may be significantly undervalued and present an excellent investment opportunity.
If you’re looking to start a property business or have identified an auction property you believe is a good investment, bridging loans could be a viable option.
Although auction properties are cheaper, buyers may not have the immediate funds to purchase them. If you’re a successful bidder, you must pay a 10% deposit and settle the balance within a month.
In such scenarios, bridging loans can help bridge the financial gap and facilitate payment of the full auction amount.
No Monthly Repayments
When facing financial constraints or starting a new project, the last thing you want is increased outgoings.
Bridging loans differ from mortgage borrowing terms as they usually don’t require monthly payments. Instead, the interest is repaid simultaneously with the loan.
It makes it easier to manage repayments than similar debt types, making bridging loans a feasible option for those in financial hardship seeking to avoid using a fast house sale company.
Paying off debts on time is crucial, but financial constraints can make it challenging. Defaulting on loans can result in losing collateral or even bankruptcy, while unpaid taxes can lead to inevitable losses.
To avoid such financial crises, having instant cash at hand is essential. That is where bridging loans come in, providing fast access to cash within a matter of days. Bridging loans can be used to pay off taxes, purchase a property, or improve your business, quickly solving financial difficulties.
In conclusion, bridging loans can be an effective financial tool for those seeking quick access to funds. Whether you need to purchase a property at auction, start a new project, or address financial gaps in your business, bridge finance offers several benefits, such as quick access to money, no monthly repayments, and avoiding losses. However, it is important to note that bridging loans require collateral, and borrowers must be able to repay the loan on time to avoid losing their property. By understanding the advantages of bridging loans, you can make informed decisions to improve your financial status and achieve your goals.