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Your Ultimate FAQ Guide On Bridging Loan Deals

24th October 2021 Print

This guide will take you through some frequently asked questions regarding bridging loans. However, for more information and guidance, do not hesitate to reach out to an expert like Finbri. We hope this is helpful for your journey!

How much of a deposit is needed?

Each borrower will be asked to state the maximum amount of money or equity they are willing to put up as collateral for their loan. This is generally between 25% and 40%.

In most situations, the applicants will take advantage of this opportunity and have their expenses subtracted from the amount before interest payments are made. So the 25% minimum may quickly seem like 30%.

Why are Bridging Loan costs so much more expensive?

Due to the risk!

A bridging loan is typically used to place an asset into a marketable condition. In addition, bridging can be utilized to generate excellent title deeds or roll interest rather than assess monthly serviceability - in other words, there's more risk for the lender to attach so they have to pay for it.

What is a closed bridging loan?

A closed bridging loan is one in which the borrower locks in a specific repayment date, or when the loan will be paid off. For example, if a property sale has exchanged contracts, the date of completion is an assured exit date.

When taking out a bridging loan under these circumstances, a guaranteed exit date can be offered. Loans with a longer repayment term are riskier for both the lender and the borrower, which is demonstrated in lending rates and costs.

What is an open bridging loan?

Because an open bridging loan does not have a specified end date, a borrower can only guess at how long it will take.

An open bridging loan is one in which the funds are to be released following the sale of a property, but there are no confirmed purchasers at the time of taking out the loan. Because these loans are unsecured, they carry a higher degree of risk for the lender since he does not know when repayment will occur. The borrower, on the other hand, is at risk since he or she does not know how long or how many monthly interest payments he or she will have to make in order to pay off the loan.

What's the difference between bridging loans and development finance?

When compared to development finance, there are several parallels. Both are only meant to be used as short-term funding solutions, and both may be utilized to fund the construction of new properties or the restoration and rebuilding of older ones.

A bridge loan or development finance facility would need to be repaid once the project is completed. This will be achieved by refinancing the completed property with a long-term financing option such as a commercial mortgage, or selling the property.

Unlike other forms of financing, bridge loans are not tied to a particular property. While they are often for periods of up to three years, bridging loans can be taken out for less than a year in some cases.

Because property development financing is often less expensive than mortgage finance, it's frequently the better choice for new construction and restoration projects. Because the loan proceeds can be disbursed as needed while work progresses, additional interest savings are possible.

If you do not have prior development expertise, you might be unable to obtain financing. A bridging loan is one possibility if this is the case.