There’s a lot more to bridging loans than many borrowers might think. Alan Margolis of Masthaven Bank examines the misconceptions and sets the record straight on this growing area of the lending market
Myth 1: Bridging finance only has one use
Bridging loans are often viewed as a type of finance only available to customers wanting to purchase a new property before selling their old one.
However, it can be equally applicable to those with more complex situations, and can also be used as a short-term financing option.
For example, a customer may want to settle a large divorce bill without needing to sell their property, make emergency repairs or settle some other liability.
Equally, buy-to-let landlords could use the loan to add to their property portfolio or provide an injection of cash to complete any conversions or renovations quickly.
Myth 2: Bridging finance is too expensive
Another common misconception around bridging is that it is an expensive form of finance. However, while rates in the past were relatively high, heightened demand for bridging finance has led to increased competition as a greater number of lenders have entered the space.
An inevitable by-product of that competition has been to force down prices, with some rates starting as low as around 6% per annum.
Additionally, borrowers will often be able to repay the loan at any time (often with just a minimum of one month’s minimum interest required), without incurring early repayment charges.
Myth 3: Bridging finance is the Wild West of property finance
What was once something akin to a cottage industry is now a respected financial sector in its own right.
Today’s bridging finance market is professional and mature, with several banks including Masthaven being leading regulated providers.
There is also a respected industry body, the Association of Short Term Lenders, which works to further develop the sector and promote the interests of members. Many lenders are also patrons of several broker organisations.
Today’s vibrant bridging market is also characterised by high levels of personalised service. At Masthaven, for example, a great deal of time and care is taken to understand the background stories of our customers and why they need short-term finance.
We want to make sure bridging loans are the right option for each customer and in turn, provide the customer with comfort and assurance.
Underwriters assess each loan application on a case-by-case basis. This way, they really get to understand the needs of the customer, what solutions are appropriate for them, and can also consider the customer’s exit strategy, namely how they are planning to repay the loan.
This is a critical difference between bridging finance and longer-term loans such as mortgages.
Bridging lenders will test the loan purpose is legitimate, and that bridging is the best option for the borrower’s circumstances. They will also want to make sure that the exit strategy has been properly considered and evidenced.
We would also recommend that customers obtain advice from a regulated adviser before entering into any secured lending, and with more and more advisers having bridging as part of their range of options, it’s becoming a more mainstream alternative lending option.
Myth 4: Bridging loans are about speed
This personal approach and a high level of underwriting for bridging loans also helps to remedy another common myth about bridging loans: that they are all about speed.
While bridging loans can be completed in matter of days, if needed, that is actually quite rare, as most people don’t need large sums of money at short notice.
Good lenders seek to ensure that the loan completes by the customer’s deadline or preferred completion date.
Myth 5: Bridging loans are a last resort
Bridging finance is often still perceived to be a last resort or an afterthought, but the current economic climate has created a rising demand for flexible finance.
Indeed, at Masthaven, we have seen a record level of applications for bridging loans during the COVID-19 crisis.
Many people have been financially affected by the pandemic and will continue to be in the future. Short-term finance options can help these individuals with for a range of uses, including debt consolidation, paying tax bills, raising capital and injecting capital into businesses.
Looking ahead
The bridging market has changed significantly in recent years, paving the way for a revolution in short-term financial solutions.
There will always be people who need short-term liquidity, and bridging finance is a viable option for many of these customers. It is a versatile solution to a variety of complex challenges, and borrowers should be confident in exploring bridging as a useful funding option for their needs.
Alan Margolis, director of bridging at Masthaven Bank
