A bridging loan is very different from a standard bank loan, but how so? Financing expert at ABC Finance, Gary Hemming explains the ins and outs of a bridging loan for Finance Monthly.
A bridging loan is a type of short term property backed finance. They are often used to fund you for a period of time whilst allowing you to either refinance to longer term debt or sell a property.
Bridging loans are usually offered for between 1-18 months, with the loan repayable in full at the end of the term. Unlike other forms of borrowing the monthly interest is often rolled into the loan, meaning there are no repayments to make during the term of the loan.
The application process is usually far simpler than for other types of borrowing and applications can complete very quickly, usually in 5-14 days.
Bridging finance can be offered against almost any property or land and can be used for a number of different reasons. The main uses are:
- Purchasing a property quickly – such as auction purchases
- Buying uninhabitable property
- Funding property restoration or conversion work
- Repossession prevention
- Buying property under market value
The pros and cons of bridging loans
Bridging loans are undoubtably a very useful tool when looking to raise finance, but they can be riskier than other forms of finance. As such, it’s important to carefully consider your options before proceeding and specialist advice is always recommended. There are a number of pros and cons to consider before committing to a loan.
- Applications are usually completed in under 14 days, making them ideal when funds are needed quickly.
- As there are often no monthly repayments to make, bridging finance can be used to raise capital where cash flow is tight, but you have the assets to comfortably repay the loan.
- The bridging market is very competitive, and this is leading to a reduction in interest rates. With rates starting from as little as 0.37% per month, bridging finance has never been cheaper.
- Where properties are being purchased under value, lending can often be based on the full value of the property, meaning it’s possible to purchase a property without a deposit.
- Bridging loans can be used to purchase properties that would be ineligible for borrowing using other types of borrowing, such as property that is not habitable.
- Bridging loans are more expensive than traditional mortgages. Although rates are dropping, traditional mortgages are still by far the most economical option for most property transactions.
- As most loans are very short term, if you have problems with your chosen method of repayment, you can face major issues. Failure to repay the loan at the end of the term would eventually lead to repossession, and most likely significant costs.
Things to consider before taking out a bridging loan
There are a number of key things to consider before taking out a bridging loan, taking the time to consider:
Always Consider Total Cost
When comparing products from different providers, always consider the total cost of the loan, rather than just the interest rate. People often chase the lowest interest rate, but many lenders will charge large exit fees, fund management fees and other ‘hidden’ costs.
Always ask for a breakdown of the total cost of taking the loan before proceeding as this makes it much easier to compare different providers.
Is Your Repayment Method Viable?
The main danger when taking out a bridging loan is that you will be unable to repay the loan at the end of the term. Always consider how the loan will be repaid upfront and make sure the proposed exit is viable.
If you’re planning to sell your property, make sure the term of the loan gives you sufficient time to find a buyer and for the sale to complete. If you’re forced to pursue a quick sale, you could end up receiving far less for your property than you would like.
If you plan to refinance onto a longer-term loan, you should check that your application is likely to be accepted. Where possible, aim to get an agreement in principle from your chosen lender before completing on your bridging loan.
Am I Getting the Best Possible Deal
The difference in cost between different providers can be significant. In addition, some lenders can only be accessed through a limited number of brokers, meaning you may not be able to access the lowest rates.
By checking with 2-3 providers, you will give yourself the best possible chance of securing the best deal.