Consider these points before you get a high interest bridging loan
Bridging loans can get you out of some really sticky situations. This includes lending you money to pay out the bank after they have taken possession of your property.
Before you go to your finance broker asking him to source bridging finance, you may need to consider the following:
Most lenders don’t just walk in and take possession of a property because you are a few days late on payment.
It usually is the result of protracted delinquency on the loan.
The bridging lender is going to give serious consideration as to why you have left it so late to seek finance. Consider the reasons you are going to give the incoming financier. Have paperwork and documents to back up this reasoning. The lender will need evidence of what has actually happened.
The loan you are asking the new lender to pay out is now at the higher of the high end of risk from a default point of view.
This means that history is not on your side as a borrower. Statistically if you don’t pay your current lender you are likely not to pay your future lenders. This means that the new lender will most likely not want to lend you a whole lot against the security.
The lender will most likely cap their loan advance at 65% of the value of the property. You need to try to work out how much equity there is in the security being offered and if there is enough to allow for a refinance to a private lender. This is best done before spending money on valuations.
How are you going to pay the new lender out?
Most private lenders won’t want to lend for more than about 12 months. One of their first questions to you will be “How do you plan to pay me out at the end of the loan?” You will need to consider this in depth before you meet with your new lender. Have a plan ready along with supporting documents ready. An orderly sale of the property is an acceptable repayment plan.
If you cannot articulate a repayment plan that is plausible, then they may back away from you very slowly, like you do a bear in the wild.
How are you going to make the monthly interest payments?
If you have lost possession of your property, then clearly you have a lack of ability to service the debt. Has something changed in your business that means you will be able to service (usually more expensive) debt moving forward? If it has, then you will need to articulate this clearly to the new lender, and also be able to provide evidence of it.
If you cannot prove servicing and you do need a 12 month loan (to be on the safe side), then the lender will want you to pre-pay the interest on the loan. This means that he will want to hold back the 12 months worth of interest from the loan advance so the loan does not go into default straight away. If this happens, your effective loan advance will be reduced by as much as 15%.
What is your property really worth?
Don’t give a lender a blue sky estimate of your estimated market value. When he works out that it is only worth half what you say, he will start to think about anything else you may have exaggerated and dig into your situation even more. Get some fair market appraisals and tell the agent you really need to be realistic about the estimate.
Ask the agent what it might be worth under forced sale conditions. There is one caveat here, agents sometimes tell you a higher estimate in order to try to get a listing. Getting a range of estimates from different agents usually solves this issue.
