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The Pros and Cons of Bridge Financing

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Many times, people and companies wanting to sell one property and purchase another, or sell one development and purchase another, go through a brief period of time when they have more financing needs than they can handle with traditional mortgages.

Consider a family selling one house to move across the country and finding a new house in their new city — but having to go ahead and get that new loan approved before their first house has sold.

A bridge loan provides the short-term financing until the first mortgage is satisfied through the sale of the first home.

Bridge loans commonly have a maximum term of one year and have higher interest rates than mortgages with longer terms. Let’s take a look at some of the benefits and drawbacks of this type of financing.

A jar full of coins
Photo by Josh Appel on Unsplash

Benefit #1: Quicker closing times

Oftentimes, you can get to closing with a bridge loan much more quickly than you can with a traditional mortgage.

Bridge lenders do not have the same regulatory hurdles that traditional mortgage lenders face, so there is not nearly as much red tape to clear. However, that means that the risk on the loan is higher.

Benefit #2: Flexible interest repayment

If you are taking out a bridge loan as a company, you can often pay back the loan on a “retained interest,” which means the cost of the interest is just added to the total loan.

If your business is focused on cash flow, this can make your payouts more reliable. If you choose to pay back the interest as “a serviced,” then the interest comes out monthly.

If the loan is for a property that is already generating revenue, such as a commercial or industrial property, or a leased rent-to-own property, that can make the payments easier to plan for.

Benefit #3: Available for different asset classes

Traditional mortgages are usually only available for particular property uses. However, bridge loans are generally available for property investment purchases, property refurbishment and land deals.

You can also establish the bridge loan as a second or even third position lien, putting it behind financing already on the property. Also, bridge financing can generally cover 100% of the required funding so long as other security, such as land or other property, is available.

Drawback #1: Higher interest rates

The best rate that you can generally get for bridge loans is 0.5 percent per month. The other side of this, of course, is that you get the money quickly, and then once you have more security in place, you can replace the bridge loan with a lower-cost traditional mortgage.

Drawback #2: Related fees

You’ll generally have to pay an arrangement fee, legal fees, valuation fees and broker fees. You can roll these into the loan, but they add to your costs.

Consider using Hank Zarihs Associates to find your bridging finance in London and UK. Our company has connections with more than 60 funders who work with bridge and development financing. The sources include private banks, foreign banks, property funds, pension funds and other entities. Reach out to one of our specialists today!

 
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