Bridging myths

Bridging finance is one of those subjects where the majority of people – even property people – do that sharp intake of breath and shake their heads.  It’s seen as expensive and ‘risky’ – akin to the kind of deal you might get into with one of those high-interest loan companies like Wonga.

It’s not.  You just need a little understanding.

Here are some the myths that need blowing out of the water:

1. A bridger will foreclose and take your property.

With a reputable bridging lender (and I only deal with these) repossession is their last option not their first option.  They’ll work with any borrower who communicates openly with them.  If you think you’re going to run over term most decent bridgers will work with you to find a solution to repay your loan.  It will cost you more, but you don’t lose your investment altogether (although you will probably take the hit out of your profit).

Getting into difficulties with repayment of your bridging loan is usually the result of your due diligence not having been as robust as it should have been.  You do need to have contingency plans for situations that can arise, like the plumber not turning up on time and holding the whole refurb up or a buyer who takes much longer to complete than anticipated.

2. You don’t know how it works.

If you asked the average man in street to define bridging finance he would probably say, “If I can’t sell my house, but I’ve found my dream house and don’t want to lose it, I could get a bridging loan to bridge the gap between buying my new house and selling my current house.”  Twenty or thirty years ago that was true, people used bridging as a chain breaker.  When you’re using bridging to finance your main residence it doesn’t show any profit; it’s 100% cost to get you from one residence to another.  No wonder people think it’s expensive.

As an investor you would never use bridging finance in this way, there should always be a profit to offset it against.  If you are using bridging to make a profit, it’s less scary.  In reality you wouldn’t do a deal unless all the costs were offset by profit.  I usually advise that the profit margin is at least 200% of cost of bridging as a minimum.

3. Fear of the unknown.

It’s natural to be afraid of something if you don’t know how it works.

Sometimes people say that FEAR is an acronym for:

False Expectations Appearing Real.

I think that there’s a better acronym:

Feeling Excited Anticipating Rewards

What is the difference between aligning yourself with one or the other?  The defining factor is knowledge.

I don’t recommend leaping into the bridging finance arena without some knowledge.  I would suggest a good broker who is experienced and can find you the right finance for your current investment project.

Even experienced property investors work with a broker and learn what works best for them with a safe pair of hands guiding them.

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