Bridging Loans – Expensive or Cost-Effective?
Tuesday, March 26, 2019, 6:00 PM | Leave Comment
Bridging loan application volumes and completions in the UK recently hit record highs. This suggests that the popularity of bridging loans is accelerating, but there are still countless misconceptions about bridging finance doing the rounds.
One of which being the expensiveness or otherwise of bridging loans.
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The True Costs of Bridging Loans
As is the case with all borrowing products, the cost-effectiveness of any given bridging loan is relative to the borrower. If the bridging loan is the only viable funding solution available and enables the borrower to turn a profit, it cannot realistically be considered expensive.
One of the reasons why bridging loans are often interpreted as expensive is the widespread misunderstanding of bridging loan rates. When applying for a traditional loan or mortgage, you’re presented with an APR – the annual rate of interest applied to the value of the loan. The difference is that with a bridging loan, the full balance complete with all fees and charges is typically repaid in less than a year.
With short-term borrowing in general, lenders are required to calculate viable rates of interest on a weekly or monthly basis. As the term of the loan may be less than a year, the APR may appear elevated. The reason being that the lender has to turn a profit on the loan within a matter of months, rather than over the course of say 10 to 25 years.
Hence, it’s inevitable that bridging loan rates appear elevated when communicated in the form of an APR.
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A Different Type of Loan
Across the board, bridging finance operates in a completely different way to a conventional loan or mortgage. Instead of a fixed long-term agreement, a bridging loan is essentially a ‘project financing’ loan with much greater flexibility.
It’s the flexibility of bridging finance that makes it such an accessible and popular choice for covering costs short-term. For example, it’s possible to repay a bridging loan in full at any time, without necessarily facing any penalties for additional charges. In addition, the funds required can be provided by way of a bridging loan within a matter of days. This contrasts starkly with the weeks or months required to secure a traditional mortgage.
Not only this, but bridging finance is also uniquely flexible by way of both applications for the funds and borrower collateral. Bridging lenders are often happy to secure loans on a wide variety of properties, which may or may not be in a good state of repair.
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Limited Time Opportunities
When a bridging loan is repaid in accordance with the agreed terms, it can represent exceptional value for money. Interest rates vary, though overall borrowing costs can be significantly lower than those of more traditional loans and mortgages.
It’s also worth considering how bridging loans can be used to take advantage of a limited-time opportunity. Unmissable investment opportunities, bargain properties at auction and so on – all calling for immediate access to relatively high sums.
In all such instances and more, bridging finance isn’t just cost-effective, but could also be the only realistic option available. – Bridgingloans.co.uk.
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