A bridging loan is a very specific type of borrowing that is only suitable for a narrow set of circumstances. It’s designed to be provided for a short period of time where a temporary gap in finances exists. A bridging loan bridges the gap until the money becomes available - hence the name.
It's secured against your property in the same way a mortgage is, which means if you don't keep up repayments, your home could be at risk.
A bridging loan is a type of secured loan. Therefore, although you can borrow between £25,000 and £25 million, you’ll need to have enough free equity on a property to act as security for the sum you borrow.
When can I use a bridging loan?
There are a number of different circumstances where a bridging loan might be suitable. One of the most common reasons to use a bridging loan is to purchase a new property while you’ll still waiting for the sale on your existing property to complete.
If you’re purchasing your new property at an auction, a bridging loan may be particularly useful as you’ll need access to the cash right away.
Some other scenarios where a bridging loan may be useful include:
- Buying a property which is currently uninhabitable
- To pay for renovation or restoration work
- Prevent repossession
- Purchase of commercial premises
- Buying land for development
There are many different circumstances where a bridging loan can be used, but the one thing they all have in common is the fact the cash is only required for a short time.
Are all bridging loans the same?
In a word, no! Bridging loans come in many variations so you’ll need to be crystal clear about what you’ll be getting - and what you’ll need to pay.
Unlike conventional finance, a bridging loan isn’t repaid monthly. Instead, it’s always rolled up and all paid together at the end. Interest is typically calculated monthly but you may also have to pay set-up fees (often around 2% of the loan value) and in some cases an exit fee. It is possible to find bridging loans that don’t charge an exit fee so it’s essential to use a broker for the best deal.
How long does a bridging loan last for?
Although a bridging loan is meant to only act as a short-term means of finance, it can be made available for up to 24 months. At the opposite end of the spectrum, some bridging loans are issued for as little as 1 month. There are two different types of bridging loan:
- Closed - where there is a fixed repayment date.
- Open - there is no fixed repayment date.
No matter which type of loan you apply for, the lender will need to know what your repayment plan is. You may be required to have a back-up strategy in case your primary repayment plan falls through.
Pros and cons of a bridging loan
Like any financial product there are pros and cons to bridging loans.
- Applications are usually speedy, giving you access to the cash quickly
- Often there are no monthly repayments so can be useful when you are asset-rich but cash-flow-poor
- They allow you to purchase properties which wouldn’t be possible with other types of loans
- Monthly interest rates start from just 0.85%
- They are more expensive than a traditional mortgage
- They are only available on a short-term basis
- They are secured lending so failure to repay the debt plus costs could result in the property being repossessed.
In the right circumstances a bridging loan can be an invaluable finance option but it won’t be suitable for all. To find out more about bridging loans or to apply, contact Loans Warehouse on 01923 678 870.