What are the downsides of short-term bridging loans?

Discussion in 'Development' started by FWL, Dec 4, 2018.

  1. FWL

    FWL Member

    We are currently looking at a property development which may require a short-term bridging loan to cover the cost of redeveloping the property. The jumping value would be significantly more than the bridging loan repayments therefore it does seem to make sense. However, what is the downside of short-term bridging loans in this situation?
     
  2. John Wilson

    John Wilson Member

    Well, the main risks are that your project is delayed out of your control and you end up needing the bridging for longer than you expected, and that the market takes a turn and you're not abe to get all the necessary fund out of the property to repay the loan. Just be sure that you've considered all risks and are happy with them.
     
  3. Karen R

    Karen R New Member

    Running into default on a bridging loan can be expensive as they can (it is usually at the lender's discretion and will be detailed in the T & C's of the loan) back date the default rate to the beginning of the loan term and default may impact your credit record negatively. That said, if you have performed your due diligence, employed the services of a reputable firm (for the work) and know the market to ensure your exit route for the short term loan is (assuming it is sale) or have your refinance offer in place for the exit if it is refinance, then short term finance can work really well. Many of our clients rely on short term funding to carry out property development and refurbishment and have great experiences. It may help you to have a plan B in place for example that way should you run into problems and know you may not complete the project within the agreed term, if you were to have a re-bridge option in place you would avoid default rates or any implications to your credit record due to defaulting on the original loan. In our experience, in most cases so long as you have prepared, know your market and been realistic about the original term of the loan, there is no reason for defaulting except in extreme circumstances and if you communicate with the lender many lenders will be accommodating. You could also use a broker to arrange the finance for you as they will have a likely long term relationship with the lender and may be helpful in the event of a default (obviously there will be fees involved but it may also gain you access to a wider selection of loan products). You could also consider taking a longer loan term, for example, if you plan to complete your project within 6 months, take the bridge for 12 months as (check with the lender) if interest is being rolled up or deducted to negate the need for term repayments while you carry out the project, you will have any unused interest refunded should you exit the loan early anyway.
     
  4. Longterminvestor

    Longterminvestor Active Member

    The obvious downside of a bridging loan is the cost BUT this cost should be considered against the end result. For example, if using £50,000 bridging finance (total cost) increases your project value by £100,000 then its a no brainer. There are risks but there are risks walking across the road :)
     
  5. realdeals

    realdeals Active Member

    Any debt has pros and cons but as suggested above, if short term finance costing £50k leads to a £100k uplift in the value of your property then it is a no-brainer. However, cost overruns and delays can prove to be extremely expensive with this style of finance. You may also need a backup plan incase things go wrong.
     
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