A Bridge loan is a short-term loan that 'bridges the gap' during times where longer-term financing is needed but is not yet available. The bridge loans provide temporary financing until permanent financing is secured, allowing current obligations to be met by providing immediate cash flow.
When a bridge loan is taken out, the lender usually finances the purchase of the new property, as well as taking over mortgages on an existing property. Many property groups are now using crowdfunding platforms as a source of bridge loans, to finance strategies including things such as renovations.
In this blog post, we take a look at Bridge Loans, their advantages and disadvantages, and how they can be obtained via crowdfunding platforms.
A bridge loan can be a very accessible source of funding for a property group looking to raise capital quickly until they secure a long-term source of financing. Crowdfunding platforms such as CrowdfundUP have listed bridge financing opportunities in the form of retail space, medical funds, office buildings, and renovation loans.
Bridge loan finance is a short-term loan, with lenders usually agreeing on terms of no longer than 12 months. Some lenders or borrowers also offer bridge financing for non-bank lender occupied home loans.
A bridge loan is usually paid back when the borrower either sells the property in question or obtains conventional financing. In the meantime, the property acts as collateral for the loan. While lenders typically do not charge upfront fees for bridge loans, some do assess a prepayment penalty if the loan is repaid ahead of schedule.
Bridge loans are useful as lenders who provide bridging finance can often allow servicing to be based on the end debt. They allow up to 3 to 12 months for existing Australian properties seeking to obtain bridge loans for refinancing or refit.
For example, assume that you qualify for $500,000 in bridge financing to develop an office building you purchased. The loan comes with an interest rate of 12%, plus three points. With a 12-month term, the total interest payments on the loan would total approximately $60,000. Once the points are deducted, the loan proceeds would come to $485,000, so the effective cost of financing would be over 15%.
When gauging what size bridge loan is needed, it’s important to factor in the points and interest. Failing to do so could create a problematic gap in funding. It’s also necessary to consider the loan to value ratio that can be used to qualify. Depending on the lender, the maximum loan amount may be capped at anywhere from 60% to 80% of the property’s appraised value.
Another considerable is there are Loan-to-value (LVR) limits that apply and that mortgage insurance(LMI) the LVR can be up to 85 % peak debt on a full documentation loan or 80 % on a low documentation loan. Also, the borrowers have to be careful, the loan will be expensive if the peak debt exceeds 80% loan to value ratio.
The risk of bridging finance is that you may be unable to sell the property you wish to sell in the allotted time frame and at that point, repayment must commence on the entire debt.
Like all financing options, it's important to know the pros and cons of bridging loans in order to compare options. Some of the advantages and disadvantages of bridging loans are listed below.
Bridging loans are a great option if you need to move quickly to buy a property. Like any other financing loan though, it’s not a debt to be taken on lightly and it pays to speak to a professional mortgage broker so they can provide the right recommendations to you. There are two avenues available for pursuing bridge loan financing.
The first is to contact a traditional bank that offers these types of loans. Keep in mind, however, that qualifying can be challenging since banks may be more reluctant to take a gamble on a development project if they perceive it as higher risk.
An alternative lending website may be more receptive to helping you meet your financial needs, including hard money lenders and real estate crowdfunding platforms.
When comparing the different lending options, it’s advisable to pay close attention to the fees, rates and terms each lender is offering.
Alternative lending can be a valuable tool to raise finance for development projects. Real estate crowdfunding provides individuals with the ability to lend money to established property groups with the expectation that it will be repaid together with interest.
Real estate crowdfunding platforms such as CrowdfundUP enable property groups to list their financing needs on the platform, such as bridge loan financing, and a network of investors to provide this financing via the pooling together of funds.
If you are looking for bridge financing to fund your development project, visit CrowdfundUP's registration page or contact us at firstname.lastname@example.org