Aren’t Bridging Loans Really Expensive?
The demand for bridging finance has grown exponentially over recent years, and yet there are numerous misconceptions that have lingered. Bridging loans are classed as alternative finance and rightly so. They are not for your everyday needs and wants like buying a laptop or paying for a holiday. They are designed for serious investors who want to make more of their money, securing deals and opportunities and compounding their wealth.
Are they costly? Yes… Are they expensive? No…
This week, we asked our followers in a Facebook poll: “Have you ever, past or present, been put off by Bridging Finance thinking its too expensive?” The overwhelming majority with 71% of the vote, responded “yes”. Of course, cost and value are not the same thing, but the results of the poll indicate that the true value of bridging finance is shrouded by the costs involved.
Why use a Bridging Loan?
Bridging loans are a fantastic source of fast property finance for investors and developers. Bridging loans are similar to mortgages, except they are shorter term and much quicker to arrange, which allows borrowers to scale their businesses, buy property in a state of disrepair and to close deals quickly. They can also be used when residential clients are stuck in a chain and need to bridge the gap between completions.
Bridging loans operate with a high degree of flexibility in terms of their structure, with options on the way you pay your interest and often the opportunity to pay loans back early without any penalties. Also, there is a great deal of flexibility in regard to the types of property that can be lent on. For example, a property with no kitchen or bathroom would be deemed “unmortgageable” by a mainstream mortgage lender, whereas a bridging lender would consider taking on the higher risk if the borrower has a credible exit strategy. They are a useful tool when used correctly creating opportunity and ultimately profit.
The real value of bridging is its ability to access capital, quickly, until a more permanent solution is found. The short-term purpose of bridging loans, if used well, is to maximise profit and scale your property business at pace. Therefore, taking out a bridging loan is a small expense compared to the potential of losing big by missing out on a deal.
Why do Bridging Loans seem so expensive then?
We are all used to one type of property loan, a conventional mortgage. The rates on these are simply not comparable but they are all many of us have to go on. With residential mortgage rates as low as 1.25% per annum it is understandable that 1.25% per month on a bridging loan seems expensive, but this isn’t a fair comparison. If you look at credit cards which most families in the UK have at least one of, rates average around 18% per annum and have done for the last 20 years. If you look at unsecured cashflow or working capital loans in the UK business sector, rates are generally between 18% and 30% per annum. Then if you look at payday loans you can expect to pay 50% or more per annum.
In comparison the average bridging loan rates of around 1% per month, even once fees and legals are added, are well on par with credit cards. However, unlike bridging loans, credit cards are designed to keep you in debt long term and have you stretch yourself financially so that you service interest for years to come. In contrast, there is nothing more important to a bridging lender than a clear exit and a way for you to pay them back within 12 months or so. Similarly, these loans are only accessible on PROFITABLE property projects. If a lender can’t see you making a clear profit meaning they get paid back comfortably, they simply will not lend.
In reality bridging loans are very competitively priced, now moreso than ever. The market is booming and with new lenders entering on a monthly basis, rates are getting driven down. There has literally never been a better time to borrow on a bridge and a good broker will get multiple lenders competing for your business driving those rates down even further. BUT, it is always project specific. If your project only has a marginal profit and you are not comfortable with the costs of finance, maybe the project is not right for you. Never borrow just for the sake of getting a project done, only borrow in order to make money, grow your portfolio and further your career.
Recent Example- Large Vacant HMO
Cost of finance: £52,000.00 for 7 months on a purchase price of £500,000.00 – A MASSIVE 10% of purchase price just to borrow the money for a few months!
Refurb cost: £40,000.00
GDV once fully let: £950,000.00
A comprehensive refurbishment combined with some solid marketing ensures a revaluation in 6-7 months time stands the purchaser in profit of £350,000.00
Worth the £50k cost of finance? YES
If ever you need clarification on what your terms really mean and how much the real cost of finance is then ask us, we’d be more than happy to explain.