Is There A Risk With Bridging Finance?
Well, this is an interesting question and it really depends who it is directed at – the lender or the borrower. Let’s explore the risks associated with bridging loans from both parties perspective.
Whether it is an open ended or closed bridging loan, the risk to the lender is that should there be a hic-up in the sale of the borrower’s property, the proceeds from which are intended to liquidate the borrowing, then interest will continue to accrue unless it is being covered by the borrower on a regular basis. Obviously, this is more likely to happen with open-ended bridging finance as the borrower may not have even found a buyer for their property.
From the lender’s point of view, the LTV is important when assessing the level of risk. If they have only advanced 50% of the value of the security provided then that is a far lower risk than if the LTV is 75%. The LTV will no doubt affect the interest rate charged. Unless there is an arrangement in place where the borrower is covering interest on a regular basis such as monthly or quarterly and the LTV is high, then there could come a point where the level of security is being eroded resulting in the lender requesting that the borrower starts to cover interest and/or reduces the asking price on their property.
However, generally speaking, the risk of the lender loosing any monies on a bridging loan is very low as long as the value of the property that they have security over does not reduce significantly.
With an open ended bridging loan, the risk to the borrower is if it takes many months to find a buyer for the property that the lender has security over, this will increase the total amount of interest that they pay as mentioned above. Another risk is if a buyer cannot be found at the asking price and the borrower needs to lower the “for sale” price in order to attract a purchaser this could impact on the capital available that they may, for instance, have set aside to carry out improvements on the property they are buying/have bought. Therefore, the borrower may wish to build in a margin for having to accept a lower sale price.
With a closed bridging loan, the above should not be a problem.
So, yes, there are risks associated with bridging finance. However, both parties can usually manage these risks.