If you are involved in real estate, the chances are high that you will be in need of some sort of financing for property development. A structure that is not developed properly will not sell – which is why you have to come up with ways to cover up the gaps.

Most of the time, this type of financing is usually done through borrowing against the property – and in most cases, the form of financing for property development goes under the name of bridging loans. By reading this guide, you will find out how bridge loan works and how it can help you in your real estate business.

Principles of Bridging Loans

Bridging finance may be used to acquire and develop property – no matter if it is of residential or commercial nature. Real estate developers may use the money to completely develop a property from ground-up – or to do some modest renovation or refurbishing on an existent home.

The key to understanding a bridging loan is to grasp their short-term nature – although short-term is actually a relative phrase. Most of the time, by “short term,” we understand around two weeks. However, according to Adiel Khan, Business Development Manager from Property Finance Partners – Bridging Loans, “the average term for a bridging loan is generally around 11 months. This is because people are trying to solve as much of the problem as they can by using a temporary solution.”

Bridging loans are, in essence, temporary loans that will allow you to get from the point where you are right now to where you want to be – until the term is paid completely and you find a solution to the problem. In other words, bridging loans represent a “bridge” between a temporary fix and a permanent one.

In terms of real estate, you might get a clearer picture of this illustration this way: think of bridging loans as a financing way to get the work done – no matter if it is renovating or completely developing a building. Its ultimate sale or arrangement of a mortgage should be the goal – the solution to this “problem.”

Main Uses for Bridge Loans

If you are interested in using bridging finance to sponsor your real estate business, here is what you may use that money for:

Buying a particular property at an auction
Renovate, convert, or restore a property
Prevent the foreclosure of a property
Buying a property that is sold at a bargain price
Changing or renovating your business office quarters
Improving your credit score

Simply put, bridge loans can be used for anything, as long as they can solve a temporary problem without compromising the permanent solution. If the temporary fix that you are doing right now will be helpful in the long term, then bridging finance is the right option for you. Types of Bridging Financing Available

Depending on their preferences or their possibilities, real estate businessmen have the opportunity of going for two bridging financing options:

Closed Bridge loans

Closed bridge loans are generally the lenders’ favourites, since they have better certainty for loan repayment. Closed bridging finance will be given for a fixed time frame – the last payment being made on a date that has been agreed to by both parties. It also has fixed monthly payments that you will have to respect. Because of these strict rules, bridge loans have much lower interest rates compared to the other type of bridging finance. However, the downside is that breaking these terms will lead to financial penalties that can be quite severe.

Open Bridge loans

Open bridging finance is generally given to those who do not wish to adhere to a fixed schedule. There are no fixed pay-off dates – but because of this, the interest rates are also fairly high. Furthermore, in order to ensure the loan’s security, lenders sometimes deduct the interest from the advance they give for the loan. This loan type is generally preferred by real estate owners who are not entirely certain of the way their business will shift.

That being said, open bridge loans are not as popular as the closed bridge ones – mainly because the interest rates are too high to take this risk.

Final Thoughts

Bridging loans can be very helpful for a real estate business if you use it correctly. The right fix can raise the value of the property greatly – increasing the profits even more as it goes on the market. You just have to choose the lender carefully so that you may get the best benefits.

By Adiel Khan

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© 2019 Adiel Khan - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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