What is a bridging loan?
A bridging loan, or bridging finance as it’s also known, is a short-term funding option that is used to ‘bridge’ the gap between a payment going out and money coming in. Bridging loans are designed to help people complete the purchase of a property that would otherwise not be possible.
What type of borrowers use bridging loans?
If a family wants to buy a new home before the sale of their existing property has gone through, they might choose to use bridging finance to ‘bridge’ the short-term shortfall in their finances. Alternatively, bridging loans can be used to access a short-term loan, for what can be relatively large amounts of money, in a range of pressing circumstances.
Bridging loans are predominantly used by landlords and property developers, particularly those buying a commercial or residential property at auction. In this case, the property will need to be paid for in full within a short space of time. The bridging loan allows landlords and developers to complete the purchase while they put mortgage arrangements in place.
- Ltd company loans
- Employed, self-employed or retired
- NO age restrictions
Given the banks’ current reluctance to lend, some borrowers are also using bridging finance as an alternative to mainstream lending. Although a bridging loan can represent a viable alternative in certain circumstances, borrowers should be aware that interest rates can be high and substantial administration fees may be added on top. For this reason it’s essential you plan your exit strategy carefully, i.e. know exactly how you’re going to repay the loan.
What are the benefits of bridging loans?
These easy-to-access financial products are ideal for borrowers who need finance fast. When time is of the essence and your dream property is on the line, while your money is tied up in your old property, bridging loans ensure you do not “miss the boat”, removing much of the stress and uncertainty from the tricky cycle of selling and buying.
Bridging loans are also very useful for non-residential buyers. As a way to source auction finance for those who make their living through property, bridging loans present a speedy way to pounce on promising properties when the time is ripe. For those seeking short-term business loans, bridging loans may also offer a way to move on to greener pastures and keep enterprises ticking over while loose ends are tied up at old premises.
What are the risks of using bridging loans?
There are a few risks to be aware of when choosing bridging finance. Like most short-term finance options, interest rates are often relatively high and admin fees are typically applied. It’s important that anyone using a bridging loan is aware of all of the charges and the level of interest they will be expected to pay, on top of their actual loan amount, before proceeding.
It’s also important to know exactly how you will repay your bridging loan. Missed payments on short-term financial products can quickly spiral into penalty fees and rising repayments. Having a concrete idea of precisely when and how you will be able to repay, and agreeing to realistic terms, will protect you from the potential risk of growing debt which, in very serious cases, can result in you losing your property.
Bridging Loans and Mortgages
Many borrowers now take on bridging loans to cover the cost of purchasing a property over the short term, with a view to later arranging a mortgage. Mortgages can take time to arrange and mainstream banks have been especially slow to lend in recent years. When you need to purchase property quickly, bridging loans can provide the funds to do so while the “nitty gritty” is ironed out with your future mortgage provider.
However, while the majority of borrowers are able to successfully purchase property with a bridging loan, then make the switch to a mortgage, there are risks involved in “banking” on mortgage approval. If you use bridging finance to purchase a property, intending to later mortgage it, there is a risk that your mortgage may not be approved. This will leave you with a substantial, high-interest, short-term bridging loan and you’ll probably be without the finance to repay it. For this reason, it is essential that you only use bridging finance for this purpose if you are 100% certain of receiving mortgage approval.
Where can you find a bridging loan?
Bridging lenders come in all shapes and sizes. Due to the sheer number of options out there, it is advisable to contact an FCA-regulated broker, we know which lenders to approach to find the most competitive deal given a particular set of circumstances. We will also be able to advise you as to whether alternative finance sources might represent a more affordable option.
Transparent Mortgage Services are independent mortgage brokers, authorised and regulated by the Financial Conduct Authority.