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Pros and cons of bridging loans

This article is part of
Guide to Bridging Loans

Bridging finance can be an extremely useful and flexible form of funding enabling short-term opportunities to be realised.

This dexterity is largely enabled by the fact they can be completed quickly. The down side of this, of course, is that rates are higher than with other forms of finance and penalty interest rates in particular are often extremely punitive. It is therefore essential that due care is paid to the repayment strategy.

While bridging loans may charge an interest rate of as low as 0.75 per cent per month, Rob Jupp, incoming chairman of the Association of Bridging Professionals, warns penalty interest if the loan is not repaid on time is typically 3 per cent.

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Alan Margolis, head of bridging at United Trust Bank, says most short-term loans are in essence similar, but where they will usually vary is with regard to interest rates, fees and charges.

“Prospective borrowers must make a realistic assessment of the cost and terms of any bridging facility and of the ability to settle it or refinance it within the agreed timescale... borrowers must still apply the same level of focus on the proposed terms as they would with other types of funding.

Mark Posniak, head of sales and marketing for Dragonfly Property Finance, agrees that the main risk is the lack of an “appropriate” exit for the borrower, though he says this has become far less of an issue since the financial crash because the industry has become “far more professional”.

Indeed, he notes that short-term finance companies will likely look far more closely at a borrower’s circumstances. A positive of this is that the loans have become more mainstream and are used frequently by those that cannot get finance from high street banks underwriting using “computer-generated credit scores and rigid, inflexible criteria”.

Mr Posniak and Mr Margolis both argue a borrower should only ever take out a bridge if they have a defined way to pay it off at the end of the designated term, whether three months, six months, nine months or 12 months.

“The exit could be a remortgage to a traditional lender, a guaranteed bonus from an employer or even the sale of the property — there are countless ways to repay a bridge.”

Speed and a bespoke approach set bridging loans apart from rival forms of finance, according to Danny Waters, chief executive of Enterprise Finance.

“The pros of bridging loans are the speed with which they can be arranged — as little as 48 hours in some cases — and the maximum borrowing level, which can easily be in the tens of millions.

“A bridging loan is only a temporary financial arrangement and will often be exited in a matter of months. In this sense, the interest rates, which can be off-putting to the uninitiated, are often hypothetical as bridging loans are rarely held for a year.”