Bridging loans should be used as a short term finance solution and as part of a wider plan prior to having long term funding in place. How you exit the bridging loan is as important as entry and must be considered and determined from the outset.
Bridging Finance Solutions Head of Underwriting, Rachel Davies offers expert advice on how to approach your exit when bridging.: “You must have a clear exit strategy in place from the outset when bridging regardless of how you expect to use the loan in the short term be it to buy a property, develop, or refinance.
“If for example, you are planning on clearing the loan through the sale of a property, make sure you have researched thoroughly the expected price and are realistic, even conservative in your estimates.
“If your exit strategy is based around refinancing, once improvement works are complete or you are working to traditional mortgage timescales, make sure that you are able to actually secure long term finance. Mortgages, be it traditional, buy to let or commercial, can be complex to secure with a number of criteria that require fulfilling before a funding offer is issued. BFS underwrite backwards from exit as part of its Lending Responsibly Policy, assisting the borrower in areas such as securing an offer in principle in place and checking credit rating, to ensure the borrower has a full ‘cradle to grave’ funding solution.
“Bridging loans are often used to purchase a bargain property through agents or via auction. If this is the case, homework again is key – make sure that the property really is the bargain that you think it is and has no structural or major issues that will cost you excessively in the long term. Professional lenders will insist upon an independent RICS survey to protect themselves and the borrower. This provides for considerably more comfort than an insurance premium and borrowers are going into transaction with their eyes wide open with a fully detailed survey report.
“It’s also worth remembering that many long term lenders won’t lend until the property has been owned by the current owners for a certain period of time.
“What’s most important is that you aware of all of the issues and where there is an anticipated cost, then factor it into your wider project cost. Ensure that the sums add up and remember that a bridge is a short term solution that will often unlock the project but is not the answer alone.”