Breaking the myths about bridging loans

There are a lot more bridging loans out there than many borrowers realize. Alan Margolis of Masthaven Bank examines misconceptions and sets the record straight on this growing area of ​​the loan market

Myth 1: Bridge financing has only one purpose

Bridge loans are often considered a type of financing only available to clients who want to buy a new property before selling the old one.

However, it can also apply to people facing more complex situations and can also be used as a short term financing option.

For example, a client may want to settle a big divorce bill without having to sell their property, make emergency repairs, or settle some other liability.

Likewise, rental owners could use the loan to supplement their real estate portfolio or provide a cash injection to quickly complete any conversions or renovations.

Myth 2: Bridge financing is too expensive

Another common misconception about the transition is that it is an expensive form of financing. However, while rates in the past were relatively high, the increased demand for bridging finance has led to increased competition as more lenders have entered the space.

An inevitable by-product of this competition has been driving down prices, with some rates starting at around 6% per annum.

Additionally, borrowers will often be able to repay the loan at any time (often with a minimum one-month minimum interest required), without incurring a prepayment charge.

Myth 3: Bridge financing is the Wild West of real estate financing

What was once something akin to a cottage industry is now a respected financial sector in its own right.

Today’s bridge financing market is professional and mature, with several banks, including Masthaven, being the main regulated providers.

There is also a respected industry body, the Association of Short Term Lenders, which works to further develop the sector and promote the interests of members. Many lenders are also the bosses of several brokerage organizations.

Today’s dynamic transition market is also characterized by high levels of personalized service. At Masthaven, for example, a lot of time and attention is spent understanding our clients’ backgrounds and why they need short-term funding.

We want to make sure that bridging loans are the right option for every client and, in turn, provide the client with comfort and reassurance.

Underwriters assess each loan request on a case-by-case basis. This way, they really understand the client’s needs, what solutions are right for them, and can also take into account the client’s exit strategy, which is how they plan to repay the loan.

This is a key difference between bridging financing and longer term loans such as mortgages.

Transition lenders will test that the purpose of the loan is legitimate and that the transition is the best option for the borrower’s situation. They will also want to ensure that the exit strategy has been properly considered and demonstrated.

We also recommend that clients seek the advice of a regulated advisor before entering into a secured loan, and with more and more advisers having gateways in their range of options, this is becoming a more common alternative loan option.

Myth 4: bridging loans are all about speed

This personal approach and a high level of underwriting for bridging loans also helps to address another common myth about bridging loans: that they are all about speed.

While bridging loans can be completed in a matter of days if required, this is actually quite rare, as most people don’t need large sums of money in the short term.

Good lenders look to make sure the loan ends by now customers desired deadline or completion date.

Myth 5: Bridge loans are a last resort

Transition financing is often still seen as a last resort or an afterthought, but the current economic climate has created a growing demand for flexible financing.

Indeed, in Masthaven, we recorded a record level of bridge loan applications during the COVID-19 crisis.

Many people have been financially affected by the pandemic and will continue to be so in the future. Short-term financing options can help these people for a variety of purposes including consolidating debt, paying tax bills, raising capital, and injecting capital into businesses.

Look ahead

The relay market has changed dramatically in recent years, paving the way for a revolution in short-term financial solutions.

There will always be people who need short-term cash flow, and bridge financing is a viable option for many of these clients. It is a versatile solution to a variety of complex challenges, and borrowers should be confident in exploring transition as a useful financing option for their needs.

Alan Margolis, Director of Transition at Masthaven Bank

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