What is a bridging loan?
A bridging loan is a form of short term property backed finance that is often used to fund borrowers for some time while allowing them to either refinance to longer-term debt or sell a property.
Bridging loans are typically offered for between 1-18 months, with the loan repayable in full at the end of the term. Unlike other forms of borrowing from direct lenders, the interest that is applied monthly is added to the loan at the end of its, meaning there are no repayments to make during the loan’s duration.
The application process is usually far more straightforward than for other types of borrowing and applications are completed very quickly, often in 1-2 weeks.
If a borrower has either land or property, then they can apply for a bridging finance. The main reasons for using bridging finance are:
- Purchasing uninhabitable property
- Funding property restoration work
- Buying property fast – for example, at auction purchases
- Preventing repossession
- Acquiring property under market value
The advantages of bridging loans
Bridging loans are undoubtedly a handy tool when looking to raise finance, but they can be riskier than other forms of finance. It’s essential to consider all the options before proceeding, and specialist advice is recommended. There are several advantages when considering a bridging loan.
- Applications are usually completed in under two weeks, making these types of loans ideal when funds are needed fast.
- As there are no monthly repayments to make, bridging loans can be used to raise capital where budgets are tight, yet you have the assets to repay the loan comfortably.
- The bridging market is highly competitive, and this is leading to a reduction in interest rates. Great for borrowers.
- Where property is bought undervalue, lending can often be based on the full value of the property, meaning it’s possible to buy a property without first having a deposit.
- Bridging loans are used to acquire properties that would be ineligible for borrowing using other types of lending, like property that is not habitable.
The risks of bridging loans
As they are indeed riskier than other forms of loans, There are a number of cons to consider before committing to a loan.
- Bridging loans are more expensive than conventional mortgage rates. Although interest rates are dropping, standard mortgages are still the most economical alternative for most property transactions.
- As most loans are short-term, if a borrower has problems with their chosen method of repayment, they can face significant issues. Failure to repay the loan, its end will lead to high costs and possible repossession.
What to consider before applying for a bridging loan
There are several vital things to consider before taking out a bridging loan, taking the time to consider:
The total cost of the loan
When comparing loans against various lenders, always consider the total final cost of the loan, rather than just the interest rate. People ignore lenders hidden hefty exit fees, fund management fees, and other charges.
Always ask for a complete breakdown of the total cost of taking the loan and read the small print before proceeding with an application.
Is your repayment method viable?
The main concern when taking out a bridging loan is that a borrower will be unable to repay the loan at the term’s end. Borrowers should always consider how the loan will be repaid and ensure the proposed term-end repayment is viable.
For those planning on selling the property, they used a bridging loan for, ensure the loan term provides ample time to find a buyer, and complete the sale. A quick sale could end up receiving far less for the property than the borrower initially wanted.
If borrowers plan to refinance into a longer-term loan, they should check that their application is likely to be accepted. Wherever possible, strive to get an arrangement in principle from a chosen lender before completing the bridging loan application.
Are you getting the best deal for you?
The cost difference between different lenders can be significant. Plus, some providers can only be accessed through a limited number of brokers, meaning borrowers may not be able to access the reduced rates as initially sought.
About the author
David Bailey-Lauring is a single father of three boys so he knows what it takes to stretch a budget when it comes to family finances! David is a small business entrepreneur and regularly writes about entrepreneurship, tech, sports and personal finance in the UK, USA, and Europe.