All bridging loans are unique, but follow the same basic formula:
- A loan is contracted to cover a short-term financial deficit, or to finance a purchase or any investment.
- The project or purchase is proceeding as planned and interest accrues on the installation on a monthly basis.
- After about six to 12 months, the loan is repaid in full – usually upon sale of the property the loan was used to purchase.
Having a concrete exit strategy is key to getting a good deal on bridge financing. This is the borrower’s plan to pay off the outstanding balance (including all borrowing costs) in a single lump sum payment.
But what happens when a bridge loan client prefers to keep the property or asset they purchased with their loan?
When a bridge loan is used to buy and renovate a residential property, could the client keep the property and rent it out to tenants – instead of selling it?
Refinancing vs Bridge Loans
For bridge loan customers who want to keep their assets at the end of the loan term, you have two options:
- You can refinance the bridge loan by converting it into a longer-term agreement, such as a commercial mortgage or a specialized home loan.
- You can first take out a bridging loan, which automatically converts into a longer-term facility with the same lender.
While both of these options pave the way to the same basic outcome, bridging loans have major advantages.
Taking out a term bridging loan reduces paperwork and administration to a bare minimum. Both the initial bridge loan and the subsequent long-term loan are issued by the same lender, eliminating the hassle of switching providers towards the end of the initial loan term.
Additionally, staying with the same lender for both facilities can result in more competitive borrowing costs. Each time a loan is taken out, the same standard fees and charges apply – arrangement fees, bridging loan processing fees, administration fees, legal fees, appraisal fees, transaction fees, etc. Whatever fees apply when subscribing to a transition to term, you only have to pay them once.
On the other hand, switch to a separate provider for the secondary long-term repayment facility and all initial fees could be payable again.
Support for independent brokers
As not all lenders offer bridging products, it is essential to apply under the supervision of an experienced broker. In addition to matching your requirements with an appropriate lender, your broker will negotiate on your behalf to ensure you get an unbeatable deal.
In addition, your broker will help you understand your obligations and rights if your situation changes along the way. Just as it is possible to convert a bridge loan into a longer term facility, it is also possible to repay a bridge loan in full at an early date to minimize borrowing costs.
Call anytime for a no-obligation consultation, or contact us by email and we’ll get back to you as soon as possible.