Minimising the Risks Associated with Bridging Loans
It is the obligation of every responsible broker to ensure only eligible applicants gain access to bridging loans; Bridging finance has the potential to be a uniquely flexible and cost-effective source of funds for a variety of short-term applications.
Bridging finance is not without its risks. As with all types of consumer loans and commercial financial products, bridging loans should only be taken out by those in a suitable position to afford their prompt repayment.
In terms of what brokers can do to minimise the risks associated with bridging loans for their clients, it is a simple case of conducting the appropriate eligibility checks; most of which are handled in conjunction with the lender, but should be verified to the most plausible possible extent prior to the application being submitted.
Here is a brief overview of the checks involved in this initial verification process:
The background of the borrower must first be examined carefully in terms of their current financial position and previous experiences regarding finance. Credit checks may be performed, though do not necessarily play a major role in a lender’s eligibility checks. With bridging finance, what matters most is the provision of sufficient security to cover the costs of the loan.
The most important consideration for bridging finance specialists, this will determine whether the applicant is considered eligible, a valuation must be conducted on the security the applicant intends to use to cover the costs of the loan. The lender may require a formal valuation where a surveyor approved by the lender will provide a valuation of the asset/s in question, against which a loan may be issued to the maximum LTV permitted by the lender, however an increased number of lenders are now also relying on automated valuation methods when assessing security, which can speed up the process and reduce the overall cost.
The applicant’s intended exit strategy must be disclosed and discussed in full, prior to their application going ahead. This involves a full disclosure of when and how the loan will be repaid, typically with formal evidence of contingency plans in place to deal with all possible scenarios. Some bridging loans are issued without proof of exit strategy, but typically attach significantly higher fees and interest rates.
Overall borrowing costs
The monthly interest rate payable on a bridging loan can be as low as 0.49% or less. However, there are often various additional fees and commissions to take into account. Examples of which include valuation fees, legal fees, administration fees, completion fees and sometimes early repayment fees.
Market comparison and lender checks
It is the job of the broker to conduct an extensive market comparison and pair the applicant with an appropriate lender to suit their needs. Lender quality, credibility and reputation must also be taken into account, along with flexibility and fairness in the unlikely event of something untoward occurring. Ultimately, the applicant should be able to trust their broker to provide honest, informed and impartial recommendations of which bridging finance specialists are most appropriate for their requirements and budget.