Expense should be considered in terms of how much the overall cost will be for your client. This can often be categorised in two ways;
1- Financial benefit – e.g. your client purchases an unmortgageable property for £100,000 at auction. With use of a bridging loan, they are able to complete renovation works of a new bathroom and kitchen, the property sells for £150,000. Once costs have been taking into account from the £50,000 return on the sale, it eliminates the perceived expensive nature of the bridging finance used. It is no longer expensive finance, but the only finance available to achieve this opportunity.
2- Emotional benefit - A landlord client’s Buy-to-Let mortgage lender pulls out at the last minute and they are already in their notice-to-complete period, having already exchanged. With the flexibility of a bridging loan, a case can complete in days – saving the landlords deposit and avoiding losing the investment property as they can still complete on the new purchase and then have a period of 12 months to arrange traditional finance on the property to replace the bridging loan.
The expense of bridging reflects the risk the lender is taking in the lending decision. They operate minimal underwriting and often secure against unmortgageable, unmarketable property that finance could not be obtained for through traditional routes. Bridging carries no redemption penalties also, so with some lenders, once the first month’s payment has been made, the client is free to redeem the loan. This all contributes to the higher interest rate the client will be charged above traditional finance.