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Buying property is often delayed significantly if someone in the chain has a problem with a sale or obtaining suitable finance. This break in the chain can have a knock-on effect that is devastating to a Buyer or seller, Non Status Bridging Finance can be used to solve this problem.
By securing bridging finance, that painful delay can be mitigated, and the chain healed mid-way through. Once the people lower down the chain find a solution to their problem, the normal course of sale-and-move continues and the bridging loan can be replaced with a traditional mortgage.
Financing a property project is not always easy. Often there are hurdles which must be overcome before traditional long-term financing becomes available. This is especially true in a development environment, where a mortgage-lender may not be willing to make the necessary funds available for a building that is not yet ready for habitation.
When there is a project that requires financing in the short-term, to get it ready for a long-term solution or because the money is needed sooner than the bureaucracy surrounding a long-term plan can be dealt with, bridging finance is there to help.
Named ‘bridge’ for the platform it creates between your current problem and the eventual finance solution, bridging finance helps you make instant investment decisions with confidence and enables you to meet your financial responsibilities without delay.
Situations That Need Bridging Finance
For the professional property investor, bridging finance is a common tool in the arsenal and can be used in a great many ways:
Rapid funding for auctions and similar opportunities
When the perfect property comes up in an auction, only those who are able to guarantee payment within 28 days have the collateral needed to make a successful bid. With bridging finance, a confident bid can be placed before a mortgage has been arranged, and without fretting over the delays inevitable in obtaining long-term finance.
Bridging finance allows the professional or semi-professional property investor the opportunity to obtain properties that might otherwise be lost in a competitive market – and once that property has been bought through the rapid funds facilitated by a bridging loan, a mortgage or similar long-term solution to replace the temporary finance can be applied for without any sense of rushing.
Often, securing long-term finance for a property which is considered derelict or inhabitable seems impossible. There is a desire to purchase the property and renovate it to a high standard, but the banks seem unwilling to provide the funds necessary to do so.
With a bridging loan, it is easy to obtain those funds to begin work on fixing up the property right away, later moving the financing to a long-term solution when the building has come up to the mortgage lender's exacting specifications.
When planning permission is required for a building project, or for an extension or addition to an existing property, traditional mortgage-lenders can be reticent to help with financing. If a planning application is in place and confidence exists that it will all go smoothly, bridging finance is an excellent way of getting that work started before any delays incur extra costs.
Once the planning permission is granted then it is easy to move away from the bridging finance and onto long-term solutions.
Extensions and improvements
Making improvements to a property to secure a higher sale value is eased through bridging finance. With the knowledge that a house will reach into a higher bracket with the addition of an extension or other improvements, obtaining bridging finance to fund that work prior to putting the property on the market is an excellent way of making your properties work for you.
Sometimes the worst can happen in a building renovation project, and an injection of cash is required to get the renovations back on track. Through bridging finance, investors have a way of securing those funds at short notice and stopping an unforeseen problem turning into a long-term disaster.
Bridging finance is not meant as a replacement for carefully planned long-term loans or other finance options. It has a specific job – to get you from A to B, and once it has played its role should be neatly closed off.
Knowing your exit strategy is key to a successful relationship with bridging finance. ‘Exit strategy’ is a term that refers to having a precise plan to knowing when you are going to pay off any outstanding finance – either by moving onto long-term lending, such as a mortgage or through selling the property and moving on to the next project.
Open and closed bridging finance
Closed bridging finance is a term used when the exit strategy is known and in place. When this is the case, the term length of the bridging finance can be set and any associated fees and amounts of interest will be known in advance and can be built into the business plan.
Open bridging finance occurs when the exact date of the exit point isn’t known. Here, the bridging loan can be offered for a three- or six-month term and during that time the investor must continue to work on his strategy for complete payment.
The Cost of Bridging Finance
Like many short-term financial solutions, the level of interest associated with bridging finance is somewhat higher than long-term alternatives. Bridging finance is not suggested as a replacement for a more traditional mortgage but is there to provide funding at short-notice to work as a stop-gap and increase opportunities for investors.
It is important with a bridging loan that the plan for a smooth exit is in place. While delays and complications do occur, they should be minimised through good financial planning and understanding.
Making sure that the company supplying any bridging finance is properly regulated by the FCA. This helps ensure that any advice given is correct for the type of business that is being considered and will help avoid any issues should there be a problem at any point.
The Pros and Cons of Bridging Finance
Becoming a Professional Property Investor with Bridging Finance
Bridging finance is available to anyone with a solid credit background and viable business strategy. If you want to move into property development, letting or refurbishment then understanding bridging finance could be the difference between a successful business and nothing more than a pipe dream.
Properly applied, a bridging loan enables you to purchase properties when the opportunity comes up, without having to wait for months to secure funds – months that often means the original opportunities slip away. It is finance that can help with house renovations or extensions and smooths over delays in the system forced by planning permission or long property chains.
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