A bridging loan from a building savings can offer certain advantages over a traditional mortgage, but it also has its limitations. Let's explore the benefits and drawbacks of a bridging loan and whether it can be used for property development or business purposes.
A bridging loan, also known as a mezzanine loan, is used by individuals to finance property, renovations, and other housing needs. It is provided by a building society and is linked to the existence of a building savings.
To understand bridging loans, you need to consider them in the wider context of building societies.
If you have a building savings account, you are legally entitled to a building savings loan. This means that you can borrow the target savings amount (or a small part of it) before you have actually saved the full amount. However, you need to meet certain conditions:
Bridging loans are used to provide financing before you meet the conditions for a regular building savings loan. Building societies decide whether you qualify for a bridging loan, while you are entitled to a building savings loan by law. Although the two loans are linked, their terms, conditions, and interest rates usually differ.
A bridging loan bridges the time between when you have a building savings loan and when you are not yet eligible for a building savings loan. It is therefore common for clients to come to a building society to get a bridging loan and a building savings contract at the same time.
With most loans, like a mortgage or a regular building savings loan, you repay the principal (the amount borrowed) plus interest (the extra money you pay for the loan) in smaller amounts. The amount you owe, therefore, decreases with each repayment of a part of the principal, resulting in lower interest payments, even though the interest rate remains the same.
In contrast, a bridging loan, like some development or business loans, works differently. From the moment you get the funds, you only pay interest on a regular basis. The principal amount owed is not reduced; you pay it all at once.
In the case of a bridging loan, you pay interest regularly plus save regularly in your building savings account to save up the amount needed to get a regular building savings loan. However, this saving is not seen as repaying the principal.
Bridging loan versus mortgage
People with low financial resources also reach for a bridging loan for the purpose of buying a home if they cannot qualify for a mortgage.
The loan can be for 100% of the purchase price of the property, so you don’t need to have your own savings, and it can even be unsecured, so you don’t have to guarantee the mortgage on the property or a third party.
You’ll pay more in interest due to the long period when you only pay interest and the principal remains the same, despite having a high loan and low repayment.
Similar to the interest on a mortgage, the interest on a bridging loan is tax-deductible.
Less well-known is also the option of a bridging loan for entrepreneurs, which can be used in the case of a development project. For example, to finance the purchase of real estate from auctions or tenders when it is difficult to obtain a standard loan due to increased risk. It can also be used to finance operational needs, such as construction or renovation, bridging periods of cash flow shortfalls. RONDA INVEST offers this option to its clients. On the other hand, it allows people to invest in these business loans.
(c) ilustration: Designed by Freepik and Pixabay
Autor:
Nikola Spurná
27. 5. 2024
I’ve got 100,000. What to invest in 2023?
Low-entry investment
Yield
The return represents the amount of money you get for the capital invested. It indicates the difference between the final value of the investment and the capital employed.
p.a. means per annum, i.e. yield calculated on an annual basis.
Example:
You invest CZK 10,000 with a return of 10% p.a. We will pay you the income in a proportional amount every month, you will get a total of CZK 1,000 in income per year.
Maturity
The maturity date indicates the binding date by which the loan will be repaid and when your investment ends.
After this date, we will send the original invested amount to your account along with the last return.
Min. investment
The minimum investment indicates the lowest possible amount that can be invested in the project.
LTV
LTV = Loan to Value
(translated as “loan to value”)
LTV indicates the ratio of the property’s value to the loan’s value. The lower the LTV, the higher the collateral.
LTV calculation = loan amount / estimated market price × 100
Prague 10, Sterboholy
EUR investment
Yield
The return represents the amount of money you get for the capital invested. It indicates the difference between the final value of the investment and the capital employed.
p.a. means per annum, i.e. yield calculated on an annual basis.
Example:
You invest CZK 10,000 with a return of 10% p.a. We will pay you the income in a proportional amount every month, you will get a total of CZK 1,000 in income per year.
Maturity
The maturity date indicates the binding date by which the loan will be repaid and when your investment ends.
After this date, we will send the original invested amount to your account along with the last return.
Min. investment
The minimum investment indicates the lowest possible amount that can be invested in the project.
LTV
LTV = Loan to Value
(translated as “loan to value”)
LTV indicates the ratio of the property’s value to the loan’s value. The lower the LTV, the higher the collateral.
LTV calculation = loan amount / estimated market price × 100
Nitra - Mlynarce
CALCULATOR
The calculator calculation is based on a model example of a one-time repayment loan investment (full principal repayment at the end of the loan term). Returns are paid to investors monthly, and the calculator does not consider reinvestment. The actual performance of the investment may differ from the model example. It represents gross yield, subject to taxation. At RONDA INVEST, there are no entry fees or regular fees.
