There are a lot of people who ask if unregulated bridging loans are safe. Paulo asks the question below as he is considering one for a purchase, but wants to know if its safe to do so. I answer Paulos question in depth below.
Question
Hi Pete,
I’ve been running a business from home and it has now grown to the point where I need to expand into a dedicated trading premises. I’d prefer to own my own office space rather than rent and have seen a commercial property for sale that would be ideal.
I’ve been told that there are other interest parties looking to buy the office space, so I will need to make an offer quickly.
I will have funds to buy it outright when a business deal I completed earlier this year pays out (hopefully in the next few months), but to make sure the property isn’t snapped up by a rival bidder, I’m considering using a bridging loan to purchase it in the short-term. My plan is to use some of the proceeds from my business deal to settle the debt at the end of the term.
The only thing that’s putting me off is something one of my colleagues told me. She pointed out that bridging loans are unregulated. Does this mean that they’re risky and unsafe?
Thanks,
Paulo,
London
Answer
Hi Paulo,
Thanks for getting in touch. Let me start by clearing something up for you: the fact that bridging finance is usually unregulated does not mean it is in any way dodgy.
When a bridging loan is being used for commercial purposes, the deal needs to be unregulated to allow extra flexibility. Commercial lending has to be bespoke and tailored to the needs of the individual, and this has all kinds of benefits. For example, somebody using a bridging loan to buy an investment property could land a deal based on rental potential rather than their income, which may be a lower figure.
That isn’t to say that bridging loans are without risk. If your exit strategy fails to pay out, exit fees and penalties tend to be significantly higher than they are for mortgages, and a term extension could also prove costly since interest rates are usually steep.
Where your application is concerned, you will want to be absolutely sure that the business deal you mentioned will be paying out the necessary amount within the required timeframe, since that’s your exit strategy and the whole deal will be riding on this.
If you feel uncomfortable with the level of risk, it’s always worth speaking to a bridging finance broker. They can assess the level of risk for you during a free, no-obligation chat and make sure you get the best deal, if you choose to proceed.
Best of luck,
Pete
You can read more questions and answers about regulated bridging loans here:
Updated: 11th January 2021
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