ADS’s guide for bridge loans refers to short-term property finance (under 12 month terms), such as emergency loans for quick settlement, second mortgage loans and caveat loans.
How Does a Bridge Loan Work?
With bridge loans, the borrower is provided with a letter of offer from the alternative lender with pricing and terms requesting the borrower to pay some upfront fees to cover the cost of a valuation report which will be commissioned and the lender’s initial application fee.
A Valuer is instructed by the private lender on an urgent basis and contacts the borrower to arrange access to view the collateral property. The Valuer issues their report directly to the private lender (note these are not always provided to the borrower).
If the valuation report is acceptable to the lender, then they typically issue a binding letter of offer requiring the borrower to sign the document and pay for legal fees to have the formal loan documents issued.
What to Watch out for in Bridge Loans
1. Keeping options open
Emergency financing facilities such as bridge loans are challenging. Some concerns that the borrower may have will be to carefully weigh up paying excessive upfront charges and only having a few lender options available. In some cases, borrowers may not get their desired outcome. Therefore, its best to have more than one financing option available so that the borrower ends up in a better situation, which is the case through ADS’s platform.
2. Time-box the lender
When conducting a bridge loan agreement, negotiate a requirement that if the private lender has not provided the funding by a certain date, the borrower is entitled to pull out of the financing and not incur any break costs. This stops the process dragging out indefinitely in situations where the financing is time critical to the borrower.
3. Valuation surprises
Quite often the valuation report comes in below the expectations of the borrower. Different private lenders have different ways to instruct the valuers including the sale time period window. If a valuer is instructed in this way, it can have a significant negative impact on the estimated valuation of the property. Some strategies are for the borrower to pay the fees only for the valuation report first before committing any other upfront costs or for the borrower to engage their own valuer to produce a report (however it should be noted that not all lenders accept all valuers).
Other Areas of Interest
- Find out more about bridge loans
- Explore ADS’s bridge loan https://alternativedebt.com.au/transactions/
- Contact us to apply for a bridge loan