Bridging loans are commonly used as a method of raising finance in order to purchase property at auctions because they can be arranged more quickly than other methods of finance. However there are also other advantages to using bridging loans for buying property at auction.
The bridging loan needs to be repaid and this can be done by selling the property. Although there are costs in setting up a bridging loan, this may well be a cheaper option than taking out a mortgage facility due to the initial setting up costs and arrangement fees associated with mortgage facilities, not forgetting the additional costs that can be incurred for clearing the mortgage early due to the high early redemption charges that often apply.
Purchasing a property at auction can frequently mean that the property has been purchased for a price below its open market value. Now that the property is owned the amount of money that can be raised by means of a remortgage may be greater than the amount that could have been raised by a mortgage to purchase the property. This is because the mortgage provider will now lend based on the property valuation, whereas when purchasing they would only be able to lend based on the purchase price. The remortgage will also provide the funds required to clear the bridging finance facility.
When looking to secure finance on property that is in a poor state of repair more traditional forms of lending may come with many conditions attached or may not be available at all. Bridging loans can be secured on derelict properties that are in poor or bad condition. Furthermore, a bridging loan can often be the only way of raising money secured on a property in a poor state of repair. The money raised by the bridging finance facility can be used to purchase the property or if already owned a bridging loan is an excellent way of raising the funds required to carry out repair and restoration work. Once the property has been repaired or modernised it is reasonable to assume that its value should have increased. Furthermore now that the property is no longer derelict or in a poor sate of repair more traditional forms of finance should now be available. Therefore the owner of the property now has the option of selling the property in order to repay the bridging loan, or alternatively remortage and take out a more suitable long term facility that will raise enough money to repay the bridging loan and provide the owner with any additional funds that maybe required.