Bridging Loan
If you need money quickly or need help selling a property and buying a new one, a bridging loan could help. Our article has more information on what bridging loans are, how they can help you and what you need to consider. If you need more help deciding if a bridging loan is right for you, or if you have any questions, get in touch with us.
What is a Bridging Loan?
A bridging loan is a helpful financing solution that assists borrowers in bridging the financial gap between purchasing a new property and selling an existing one.
This type of loan offers swift access to funds, particularly during times of sale delays, which can be crucial in time-sensitive situations.
Bridging Loans are ideal for a variety of purposes, including bridging the gap between buying and selling properties, as well as providing temporary financing for investment maturation.
Additionally, this type of loan can offer the necessary funds to complete urgent projects or provide quick access to capital.
Bridging Loan Example
A bridging loan is a type of loan that provides short-term funding to people in specific situations. Here are four examples:
Example 1: Tom wants to buy a new home, but hasn’t sold his current one yet. He applies for a bridging loan to secure his purchase of the new property. He will repay the loan and interest when his current home is sold.
Example 2: Joanne is renovating a buy-to-let property, but doesn’t have enough money to complete the renovation. She applies for a bridging loan and will repay it when she sells or re-mortgages the property.
Example 3: John bought a property at auction but needed to complete the purchase in 28 days. Traditional lenders couldn’t process a mortgage quickly enough, so he took out a bridging loan. He will repay the loan once he has found a longer-term lender.
Example 4: Dawn wants to buy investment properties quickly but has limited cash available. She sets up a pre-approved drawdown bridge loan based on the value of her existing properties. She will repay the loan and interest when she remortgages the property.
Advantages and Applications of Bridging Loans
This section explains the benefits and uses of bridging loans and helps you decide if they are a good option for your financing needs.
Bridging loans can provide fast financing and are usually completed in 1-2 weeks, compared to 3-4 months for a standard mortgage. They are designed to bridge the gap between long-term investments and are very flexible.
Bridging loans can be used by anyone, regardless of poor credit or other complex financial situations, and can be secured against one or multiple properties. They are available for all property types, including those for living, renting, and commercial use.
Types of Bridging Loans
Bridging loans are short-term loans used when people need to buy property quickly. There are two types: open and closed.
Open bridging loans are for those who have a plan to repay but aren’t sure when; closed bridging loans are for those who know when they can repay. Open bridging loans have higher interest rates and are secured against the property. They can be repaid when funds become available or by refinancing with a longer-term mortgage.
Closed bridging loans have lower interest rates because they’re more secure, but proof of repayment is required. Closed bridging loans are repaid through the sale of the property. It’s essential to read the terms and conditions of the loan before taking it out, as there are penalties for not repaying on time. Bridging loans are beneficial for buying properties at auctions or when renovating, as they usually require minimal paperwork and quick access to funds.
Pros and Cons of Bridging Loans
When considering whether a bridging loan is the right choice for you, it is important to evaluate both its potential advantages and drawbacks.
Pros of Bridging Loans
A bridging loan offers several advantages to help you finance your business quickly. One of the key benefits of these loans is their easy accessibility and quick processing.
They can provide immediate access to the funds that you require for a range of business operations and investments without any delay. When it comes to underwriting, property type and how the loan will be repaid are the main criteria, making a wide range of properties eligible for consideration.
Moreover, bridging loans are short-term, which means that you can get the necessary funding without making a long-term commitment.
Additionally, these loans are highly flexible and can be customized to meet the borrower’s requirements. All of these features make bridging loans a suitable option for a diverse range of financial situations.
Cons of Bridging Loans
Bridging loans offer a practical solution for borrowers but come with higher interest rates than other types of loans.
This is owed to the high-risk nature of the loan, as lenders take on a greater degree of risk with these short-term loans.
Bridging loans require a repayment plan to be established before approval. It is essential to prepare a repayment plan to avoid the necessity to refinance or extend the loan which could lead to additional unexpected costs.
The repayment plan will keep you on track with your payments and ensure that you pay off the loan promptly. Overall bridging loans should be considered as a viable option for borrowers, but it is crucial to get professional advice before making a financial decision.
Alternatives to Bridging Loans
There are various loan options available for individuals and businesses, each offering different benefits depending on specific needs. For longer-term loans, a personal loan or secured loan can be practical solutions.
Personal loans provide a consolidated sum to be repaid over a set term, while a secured loan can offer lower interest rates by using a property as collateral.
Businesses or individuals looking for short-term financial assistance with their cash flow can consider options like overdraft or invoice financing. Overdrafts offer the flexibility to pay back amounts borrowed over a set period while invoice financing allows businesses to access funds against unpaid invoices.
Finally, asset finance and credit cards are additional options for those who need funds in the short term. Beyond interest rates, it’s important to consider which option meets specific needs before committing.
Bridging Loan Interest and Costs
Bridging loans serve as a valuable resource for those seeking to achieve their objectives. Although they often come with higher costs than alternative financing options, it is crucial to be aware of the associated fees and interest rates before making any decisions.
Bridging loan rates of interest are charged on a monthly basis, with rates ranging between 0.5% and 1.5% per month, depending on factors like loan-to-value ratio (LTV) and lender type.
Other costs may arise, such as fees for arranging the loan, legal expenses, or valuation charges. The precise expenses associated with a bridging loan will vary depending on the borrower’s specific needs and the nature of their business.
Therefore, it is critical to consult with a specialist mortgage advisor to consider all variables before committing to any commercial agreement.
In Conclusion
Bridging loans are useful for short-term financial needs and bridge the gap between transactions.
Know interest rates, fees, and repayment terms beforehand.
Our experts can help answer your questions. Good luck reaching your financial goals!
FAQ (Frequently Asked Questions)
A bridging loan is a temporary financing solution that typically carries a monthly cost ranging between 0.5% to 1.5%, with the possibility of a lower rate of 0.4% depending on the amount borrowed. To obtain a bridging loan, the borrower is required to cover the cost of a property valuation and legal fees. Furthermore, the lender charges an arrangement fee equivalent to 2% of the borrowed sum. The borrower can elect to settle the arrangement fee upfront or opt to incorporate it within the loan amount.
Bridge loans are faster than regular mortgages. Bridge lenders are fast and can finish a loan in 1-2 weeks. But, there’s still some legal stuff to do, so it usually takes 4-6 weeks to finish everything.
A bridging loan is good for quick money needs or to fill cash flow problems. Learn the cost of the loan first before agreeing to it.