What Is a Bridging Loan – And How Does It Work?
When you’re in the middle of trying to move home, there’s nothing worse than having the financial rug pulled out from underneath you! You may have agreed to sell your old home and be set to move into a shiny new property – but what if you’re still waiting for funds to clear?
Rather than take out a further mortgage of sorts to keep things rolling, you may wish to consider a bridging loan.
Bridging Loans – The Lowdown
Essentially, bridging loans allow you to borrow money through very short timescales. Providing you have an asset you can secure a loan against, arranging this type of finance is generally very straightforward. A bridging loan aims to help you bridge the gap of time between funds clearing at one end so you can finish a purchase at the other.
For example, you may find that you want to buy a property at auction at very short notice – or if you’re stuck in the middle of a property chain that’s going nowhere fast. You simply want to move across – and it’s not necessarily your fault that funds are yet to clear. In which case, it’s worth appealing to lenders for bridging finance that you can pay back in the short term once you do have the money cleared and available.
You may also wish to take out a bridging loan if, for example, you’re investing in land to develop on or if you’re buying property that’s going to take time and money to make it habitable. If you don’t have the capital to make ends meet right away, it’s a good idea to consult a lender or financial advisor who can help you transition swiftly and safely.
Multiple bridging loan types are available, such as a variable or fixed rate. Fixed rate loans are predictable, but can work out as more expensive in the long run. You can also borrow money through a closed bridge loan with a fixed repayment period. Open loans, meanwhile, are much more flexible – but, as always, there may be terms you need to pay attention to for full eligibility.
What Can I Borrow With a Bridging Loan?
Your bridging loan potential will, of course, revolve around your credit score, your available assets, and you’ll be at the discretion of your chosen lender. You’ll need to ensure you can secure such a loan to the property you’re moving to or a significant asset elsewhere.
Bridging loans generally get repaid – or, at least, the lender requests that you repay – within the 12 months to 18 months mark of setting up an arrangement. You may be able to borrow as little as £50,000 with this type of loan – but for larger projects of more significant value, you may be able to borrow millions on a short-term basis. Circumstances will vary and, of course, dictate what you can borrow and how you can pay it all back!
What Are the Main Benefits of a Bridging Loan?
Bridging loans are highly attractive to many people looking for a short burst of cash for specific reasons. Many people take out private bridging loans, for example, for house purchases – whereas these loan options can also prove useful for commercial needs (such as purchasing office space).
A bridging loan is likely to provide you with a larger sum of money than you might expect from most lenders at such short notice. As mentioned, you could potentially borrow millions with a bridge loan – and repayment terms are highly flexible on average, too.
Typically, you can expect to get access to bridging loan money within 48 hours of your request – if you’re successful. Of course, timescales can and will vary from lender to lender.
Ultimately, bridging loans prove to be extremely convenient. They are great for ensuring that you can finish a house sale without having to sell off other assets. However, with this immense convenience and turnaround comes a cost – which is one of the few downsides to bridging the gap.
The Downsides of Bridging Loans
For all that a bridging loan can grant you access to a high level of finance within a short period of time, interest and repayment rates are likely to be higher than what you’d expect with traditional lending options. This is purely because your lender is allowing you to borrow more money over a shorter period – and they will need to make money back for the privilege.
Again, the fact you’ll need to secure assets against your loan means that there’s always going to be a risk of you losing your property or other high-value investment if you default on your arrangement. Crucially, you need to ensure that you can adhere to the repayment policy and schedule laid out by your lender. If not, you risk paying fines, your agreement collapsing, and potentially facing legal action.
It’s vital to ask for help from a financial advisor before you consider tying assets to any loan arrangements. Do also consider whether or not a bridging loan is the best course of action to gain temporary finance – is there a more secure way for you to find funds in the meantime?
It’s also worth considering the overall costs – as well as interest rates, you can expect to pay arrangement fees and exit costs where necessary.
Are Bridging Loans Worth the Effort?
In many cases, yes – bridging loans can be immensely helpful when you need access to capital at short notice. In commercial and private scenarios, if you are let down in a buying chain at the last moment, it can be useful to have finance available to plug the gap.
As with all forms of short term finance, always check that you can afford to pay the money back that you owe over the period your lender expects. Why not consider a few alternative sources of short-term finance, too, before you go ahead and make a final decision?