Bridge loans by their very nature or definition, are short term loans or mortgages that are required to meet some form of short term obligation and in many cases the payout of the bridge funds in the first step in a process to get to the exit strategy that will repay the funds.
So first and foremost, there is a certain amount of transaction risk that comes into the equation for lenders.
Because the transaction to be completed and the related process required to get to an exit strategy to repay the bridge, has actions that need to be completed by one or several people, the transaction risk can be considered to be significant, even when all the pieces are lined up.
The result with respect to the cost of capital is that there is higher risk premium attached to most bridge financing transactions as compared to a more conventional transaction.
In addition to transaction risk is market supply and demand factors.
There are significantly less lenders in the market that will do bridge financing as compared to more traditional financing.
The lenders that do partake in this market have the skill set and resources to facilitate these types of deals including managing the exit strategy that will return their money.
Because the supply side for these types of deals can be lower than the demand side, especially when you build in the regional focus of most private lenders, there is a premium attached to these types of deals.
Another characteristic of bridge lenders is that they need to be able to assess and fund quickly as most bridging lending scenarios have very short timelines to work with.
In many situations the reason for the bridge financing in the first place is because some other form of capital or specific event to a transaction did not materialize when it was supposed, facilitating the need for another source of capital with the time remaining to complete whatever the deal is.
So in order to get bridge financing in place, the lender not only has to do this type of lending, but be able to do it quickly, which further reduces the amount of supply in the market place.
Speed is also the reason why either residential or commercial property financing is a preferred form of bridging due to the speed in which a property can be evaluated and taken as security.
Add all these factors up and you end up with a higher cost of financing related to risk, supply, and speed.
Borrowers on the other hand will argue that if all the pieces in the process to repay the bridge are in place that there should not be a higher cost of financing attached to these loans.
But this argument only holds true if there are several lenders in the market that would go along with the logic, which there typically is not, so we are back to the issue of supply and demand.
Bottom line, bridge loans save a lot of deals and even though the cost of capital may be higher than what you’re used to paying, the total cost of financing for a bridge loan may be a mere fraction of what you out of pocket cost or opportunity cost is if the funds are not made available to your deal in the time you have to complete it.
If you require a bridge loan and have assets to leverage, I suggest that you give me a call so we can quickly assess your situation and provide financing options for your immediate consideration.
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel