Even when an application for bridging finance is successful, risk plays a major role in determining the competitiveness of the loan. The greater the risk of non-repayment or defaults on the part of the borrower, the higher the rate of interest and borrowing costs are likely to be.
But what exactly does a lender take into account when establishing the risk-level of a transaction? More specifically, what can a borrower do to present themselves as a low-risk candidate for competitive bridging finance?
Experience and Track Record
When applying for a commercial bridging loan, the first thing your lender will want to assess is your experience and track record in the field. For example, if you are applying for a buy-to-let bridging loan, you may be asked to provide evidence of your existing portfolio and general background as a BTL landlord.
The information and evidence you provide play a key role in the lender’s subsequent decision-making process. But as many bridging loan applicants are just starting out in their profession, evidence of experience and an established track record is rarely mandatory.
Even so, convincing evidence of relevant experience and success in your field can pave the way for a more competitive deal.
Security for the Loan
The main determining factor when applying for bridging loans is the applicant’s ability to provide appropriate security. Bridging loans are a type of secured loan where assets of value (usually the borrower’s home) are used to cover the costs of the loan.
If you can offer assets of value that comfortably meet or exceed the costs of the loan, you are almost guaranteed to qualify for a bridging loan. The higher the value of the assets you provide as security, the more competitive the deal you can expect to be offered.
Eligibility and borrowing costs vary in accordance with the nature and value of the assets used to cover the costs of the loan. Lenders typically prefer the types of assets that are easy to sell (in the case of non-repayment), such as homes and commercial properties in good condition.
A Concrete Exit Strategy
The exit strategy you outline during the application process is just as important. This is the formal evidence you provide which specifies exactly when and how you intend to repay the loan. For example, when the property you buy with the bridging loan is sold to a new buyer, or when you transition the bridging loan to a longer-term mortgage.
It is not always necessary to provide evidence of a concrete exit strategy, as some lenders are willing to offer ‘open’ bridging loans. However, the viability of your exit strategy will have a major impact on the affordability of the loan.
Questionable exit strategies and ‘open’ bridging loans are naturally considered riskier transactions, and are therefore issued with elevated borrowing costs.
