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3 Myths About Bridging Finance

bridging finance Jun 30, 2019

You couldn’t describe bridging rates as ‘cheap’, they are significantly higher than mortgage rates.  You could pay three or four times the interest rate that you’d expect to pay on a BTL mortgage.  BUT, that doesn’t mean you should run away from bridging as a funding strategy for your property investments.

Understanding how to make intelligent use of bridging will move you from the fog of the mortgage buyer mind-set to the clarity of a cash-buyer mind-set (and you don’t need an abundant bank account to get started).

While you’re focusing on the cost of bridging you’re missing the profit opportunity.  Sometimes such opportunities can be substantial, even massive.

If you could make a profit of £40K, but bridging finance cost you £10K, is that a deal you would do? 

These are the three biggest myths about bridging:

  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.  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. 

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.  Let’s be realistic - a mortgage lender will foreclose if you keep missing payments too.  The risk is no more, if not less.

  1. It’s difficult and complicated (and you don’t really understand it)

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.”  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, 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.

  1. 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.

If you’ve never had a driving lesson sitting in the driving seat of a car is scary – you’re a danger to yourself and to others.  When you’ve had some instruction from a qualified instructor, you learn one step at a time until you understand the risks – and, more importantly, you learn how to avoid them and manage those you can’t completely avoid. 

As you learn how to control the car the risk reduces and fear recedes. 

Bridging finance is like a car; it can go from being your biggest fear to becoming your greatest asset.  It gives you freedom and mobility and no longer appears to be a liability.

Now all you need is to learn how bridging can be the first step towards bigger profits.

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