What is a commercial bridge loan?
Commercial bridge loans are utilised when there is a gap in financing that needs to be filled quickly. It essentially is a short-term loan that is often arranged within a short time-frame (e.g. 72 hours) and may be made to an individual or a company or instead secured against residential or commercial property.
The defining characteristic is that it is a loan that bridges the gap to an exit, which is usually a refinance or a sale of the asset. It is considered as interim financing until the next stage of financing is obtained in which it is either permanent or temporary to bridge the gap between a debt coming due and the main line of credit becoming available.
Who takes out bridge loans?
This form of loaning is considered popular amongst many individuals and businesses including professional landlords, property investors and developers in which the financing is employed through their overall property funding strategy.
Why take out a bridge loan?
To complete a development project
Raise finances as quickly as possible
Bridge gap between oncoming debt and credit available
Raise deposit for purchasing property
Purchase commercial or residential real estate property
Are bridge loans expensive?
Given that bridge loans are used for a specific short term purpose, the specialist nature of the loan necessitate that bridge loans are required to be typically more expensive than conventional financing to compensate for the additional risk involved. These loans also tend to offer higher interest rates than traditional term loans accordingly to amortize costs over a shorter period. The interest rate charged will depend very much on the proposition in question; however, current rates range from 0.7-1.5% per month, potentially with even higher rates on more difficult propositions.
However, with much different mortgagebrokers entering the market, there is a wide variety of charging structures so, in addition to the interest rate borrowers may pay a variety of other fees to the lender.
How quickly can bridge loan be arranged?
A bridge loan can be typically arranged quickly with relatively little documentation in a matter of hours, however, it can take up to three weeks to successfully release the funds. The stipulations of the loan grant the term length to be as short as one day usually up to a maximum of 12 months. Loan amounts generally start at around £25,000 with no maximum.
What are the risks of taking out a bridge loan?
It is essential to establish a clear exit strategy to ensure the loan can be repaid (either via sale or remortgage) to avoid paying high penalty interest. It also imperative to understand the terms of agreement undertaken to ensure that there are no hidden fees that entail after the bridge loan is taken out.
Almas is the owner of Rainstone Money London. He loves to update people regarding the mortgage