Are bridging loans ever worth the extra interest?

Discussion in 'Property Finance and Real Estate Loans' started by nmb, Feb 14, 2016.

  1. nmb

    nmb Well-Known Member

    The chances are if you’re looking for a bridging loan you are waiting for a property to be sold while trying to fund a new purchase. Bridging loans are more commonplace than many people might imagine but is it ever worth the extra interest that many of these attract?

    Bridging loans only really work on a short-term timescale if the funds you expect in the future arrive on time. Many bridging loans will have significantly higher than average interest rates and there may well be penalties and additional fees if you are forced to extend the loan period. If the deal that you are waiting to fund is attractive, well priced and a bridging loan is the only answer, there may be long-term benefits for you.

    Make sure you are aware of any penalties and charges for extending your initial bridging loan agreement.
     
  2. Nicholas Wallwork

    Nicholas Wallwork Editor-in-Chief Staff Member Premium Member

    For many the higher interest (often 1% per month + in/out fees) is definitely worth it.

    I use bridge loans (and JV loan finance) to buy and refurbish my deals before exiting with a commercial end loan or sometimes the occasional sale. The money coming in is the commercial refinance. This allows us to develop using 100% other people's money and it's a true win/win relationship.

    We add so much uplift through the planning and development phase that the cost of these loans is easily covered as long as there are no significant delays and you can get out quickly... The extra cost is always considered and calcuted as part of the viability assessment we do when sourcing sites for our development pipeline. If the overall costs are calculated to be too high when we're buying then we limit our offer to what it's worth to us and that's it.
     
  3. nmb

    nmb Well-Known Member

    That is a very interesting strategy as historically I have tended to associate bridging loans with those having trouble organising traditional loans when selling one property and buying another. However, if you can more than make up the cost of the bridging loan with the uplift in the development value at the end of the development phase then this makes perfect sense. What kind of average uplift would you expect to create during the development phase?
     
  4. Denise Webster

    Denise Webster New Member

    Bridging loans have their place in the market, it comes down to how desperate you are to get capital ready. Repayments can be flexible and the outstanding balance can be made in one payment with a property sale or by refinancing.
     
  5. Nicholas Wallwork

    Nicholas Wallwork Editor-in-Chief Staff Member Premium Member

    It totally depends on the development (size, location, cost of land initially). A good return would be 60-70% increase in the value for a typical office to residential property development in the south east of England... you have to do a lot of work to get that though, it's not just a lick of paint...
     
  6. nmb

    nmb Well-Known Member

    How quickly would you look to turn around a development property bearing in mind the higher interest rate associated with a bridging loan?
     
  7. Longterminvestor

    Longterminvestor Active Member

    While you need to have a healthy respect for debt, if used correctly it can be a very lucrative source of future income. Debt is not always bad!
     
  8. Joe Aston

    Joe Aston New Member Forum Partner

    A couple of points from a financing perspective; worth mentioning that most lenders have no exit fees on a bridging loan, so depending on keeping within timescales etc so you're not penalised for completing on a project early for instance. (a rarity I imagine!)

    Also bridging loans are the current flavour of the month with a lot of lenders and thus the rates are dropping to very competitive levels. For the perfect circumstances (high LTV, previous experience and light refurb work needed) we are seeing as low as 0.55% interest on some bridging loans.
     
  9. Vidit Agarwal

    Vidit Agarwal New Member

    A Bridging loan is a fact financing that allows you to purchase a new home without first having to sell your existing home. Banks calculate the size of the loan by adding the value of your new home to your existing mortgage and then subtracting the probable sales price from your existing home. This requires a valuation by the bank that costs about $ 200 to $ 220.Our DNS Accountants team help you regarding Bridging loan.
     
  10. Analia Siele

    Analia Siele New Member

    Do anybody know any company or private funds who can do an international bridge loan for Uruguay property?
     
  11. Longterminvestor

    Longterminvestor Active Member

    The bottom line is that the interest rate on a bridging loan is only relative to the expected return - if your loan is costing you 20% a year (example figure) but you are expected to create a return of 50% or 100% by using the bridging loan funding then it is a no-brainer. If it costs you 20% and your return on investment is just 10% then you probably need to look at the whole project again.
     
  12. Laurence Mills

    Laurence Mills New Member

    Bridging loan interest rates are dropping dramatically this year, there are many new lenders entering the market, and a rate war has sadly begun. However, it is important to remember that the industry is still very old-fashioned in the way business is conducted. Clients are still paying high broker fees, and often fitted into financial products that don't suit their requirements.

    Possibly the use of master brokers may be the way forward? As they can compare a panel of established lenders, to find the best solution in such a specialised market.
     
  13. Using a master broker will only serve to encourage those high broker fees, although there are a swathe that are moving away from the high fee model.

    Most bridging lenders will charge a 2% lender arrangement fee and most will pay away 1% to the introducing broker, some even going the whole hog and paying 2%.

    Even on a most bridging loan of say £250,000 that represents a good fee so there really is no need for a master broker to charge broker fees on top.
     
  14. Laurence Mills

    Laurence Mills New Member

    However, many master brokers have exclusive arrangements with lenders to be paid on volume, rather than taking a fee on every deal. Bridging finance is all about speed, therefore, their expertise in such a complex market, can only be beneficial.
     
  15. Josh Caldwell

    Josh Caldwell Josh Caldwell - American Real Estate Investor

    Short answer is 100% yes. The interest rate is almost irrelevant if your deal is good enough. I will give you an example to prove this. Let's imagine that you are sitting on a stellar deal. You need financing for 12 months to buy raw land and develop it. The purchase price or the land and development cost are $2,000,000 and your net profit when you exit the deal in 12 months will be $3,200,000. You would gladly give up a ridiculous 20% to get this deal done because in this instance 20% is only $400,000, that would leave you with a tidy $2,800,000 in profit as opposed to the zero you get if you don't do the deal.
     
  16. Longterminvestor

    Longterminvestor Active Member

    Have crowd funding websites eaten into the margins of traditional bridging loan providers?
     
  17. Josh Caldwell

    Josh Caldwell Josh Caldwell - American Real Estate Investor

    They must be eating into the profits of traditional bridge lenders. Just as a means of alternate funding in a competitive landscape. Each new form of lending has to hurt the established lenders to some degree. With that being said, I am seeing no shortage of bridge lenders.
     
  18. FWL

    FWL Member

    There will always be investors looking for advice and guidance when taking out bridging loans as opposed to those who have expert knowledge and are comfortable in the crowdfunding market. However, evidence does suggest that profit margins are coming under pressure because of the reduced costs associated with crowdfunding operations.
     
  19. tyronevohz

    tyronevohz New Member

    Most banks don't always offer bridge loan services because they would like mitigate the risk of defaulting on the loan. So it's why most people go to private lenders to finance their investment. Even then, not everyone has the kind of money/ financial security to service their debt after the loan term is over, so the individual who's likely to consider to invest in another property should aware of his/her own financial capabilities
     
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