Bridging finance is more affordable than you think

In an article produced for FIBA Advantage magazine, we discusses the misconceptions of bridging finance and how it is fast becoming the first-choice solution for brokers and their clients’.

Bridging finance is becoming the first-choice option for many property investors and developers. A bridging loan is a type of finance option which can be used in various circumstances and commonly used by borrowers who need to receive funding almost immediately.

Not only does bridging finance enable borrowers to access finance rapidly, it also has many other advantages including, customised solutions, because each loan is evaluated on its individual merits, i.e. a personalised solution can be found. In addition, bridging loans also provide flexibility, as most bridging lenders are not bound by the restrictive loan conditions other traditional finance options are tied to.

Many brokers and borrowers are still under the impression a bridging loan is significantly more expensive, compared to alternative traditional options, such as a mortgage.

While years ago, lending rates were notably higher, this is no longer always the case. The total cost of a bridging loan depends on the interest rate the borrower pays, how long they require the loan for, as well as the various fees and admin costs involved.

Recently, Hope Capital enhanced its Discounted Rate Loan, with rates now starting from just 0.39% per month. The loan offers borrowers the option of a discounted rate whereby the initial period (3, 4 or 6 months) is at a reduced rate. This can be key in helping borrowers manage cashflow, particularly if a property is not generating income on day one.

For example, a borrower purchasing a residential property requiring some refurbishment work prior to it being rented out, would benefit from low monthly repayments during the period of no rental income. Once the property is tenanted and income is coming in, the borrower can then meet the increase in monthly repayments.

Ultimately, the purpose of the Discounted Rate Loan is to help borrowers achieve a balance between affordability, optimal loan amount on day one, cash-flow and loan to value.

By way of an example, Hope Capital were recently approached by a client who had secured a mid-terrace property at auction and needed to receive funding almost instantly to complete the deal. As this was an auction purchase, the client was in a position where they could initially not obtain a mortgage.

After speaking to the client about their needs, it became clear the best option would be Hope Capital’s Discounted Rate Loan for a 12-month term. The borrower would service the loan at a lower rate for the first six months and the remaining term would be at a higher rate.

This arrangement enabled the client to receive the extra cash needed on day one to complete the refurbishment works, which were planned to be completed by the third month.

Once the refurbishment works were completed, the client intended to rent the property out so they could then easily meet the higher monthly interest payments using the rental income received via the tenant.

In this instance, the borrower was able to redeem the loan in just 7 months meaning the blended interest rate was 0.69%. If the borrower did not have an option like Hope Capital’s Discounted Rate Loan, the client would have ended up paying more.

With this product, the client saved money and had the flexibility and speed needed to complete the auction transaction. Additionally, owing to the client having over 6 months ownership of the property and a tenant in place, the client was also able to refinance and secure a highly competitive rate on a buy-to-let mortgage.

In summary, the misconception of a bridging loan only being used to facilitate difficult situations or being notoriously expensive is starting to diminish, as more and more brokers and borrowers recognise the advantages of specialist finance.