Bridging finance is a flexible way of raising short-term capital, but like all loans, there are risks involved. Borrowers need to be aware of these risks, and plan accordingly.
An open bridging loan has no fixed repayment date, but it does have a loan period. The loan needs to be paid before the loan period expires. A closed bridging loan has a fixed repayment date.
Borrowers can repay bridging loans early and this will save them interest charges. However, if the loan is not repaid, it is in arrears and charges will be incurred. A loan will have a standard arrears fee. After this has been paid, the lender may agree to an extended period to repay the loan, but the borrower will have to pay a monthly arrears charge.
As a last resort, a lender can take the borrower to court if any agreed payment terms are not met.
If arranging a closed bridging loan, the borrower needs to be confident that they can meet the repayment date. When arranging an open bridging loan, it may help to ask for a loan period that is longer than needed in case there is a delay in raising repayment funds. A borrower can always repay the loan early.
Breaching loan conditions
The lender may apply conditions to the loan. For example, if a bridging loan is being used to complete a house purchase before the sale of an existing house, a condition of the loan could be that the borrower is prohibited from renting out their existing house. Failure to comply could result in the property being repossessed for breaching the loan conditions.
It is up to the borrower to read and understand any loan conditions and abide by them.
Failure of the exit strategy
An exit strategy is a plan for when and how the money will be repaid. Usually, repayment is made by raising money from the sale of property. If the property does not sell, the loan may not be able to be paid in time, which will cost the borrowers an arrears payment. If the property remains unsold, it can be repossessed. If it does not sell because of a temporary slump in the housing market, instead of repossessing the house, a court order could evict the owners and the lender rent out the house. Though the property is still owned by the borrower, any rental income goes to the lender.
Before applying for a bridging loan, lenders need to research the market. No matter whether the property is commercial or residential, it should be the type of property that is likely to sell within a reasonable period of time.
As long as a borrower is aware of all risks, they can minimise them. Why not talk to Ascot Mortgages about bridging finance? One of our advisors will discuss any risks and what you can do to make your loan as risk-free as possible.