You may have heard of a bridging loan before, but do you know what it means or the purpose of one?
Bridging loans are a short-term, secured loan and they’re designed to provide quick access to cash in order to ‘bridge the gap’ between a pending financial need and the availability of funds from a longer-term source.
This guide will take a look at how bridging loans work and the common uses for such loans in everyday life.
How do bridging loans work?
Bridging loans are short term, typically lasting from a few weeks up to twelve months and rarely beyond 24 months. The loan is secured against high-value assets. This is typically property or land that the borrower owns.
As a secured loan, it reduces the risk for the lender, allowing them to release funds quickly. However, it does mean you risk losing your property if you’re not able to repay the loan in full.
Lenders will typically focus on the value of the property and your plan or ‘exit strategy’ as it’s often referred to, rather than just your own income or credit score.
Instead of monthly repayments over man years, you’ll typically repay the entire loan amount, plus any interest or fees in one lump sum at the end of the term. The interest is added to the total loan and paid back when the loan is cleared.
You can also have something called serviced interest, which is where you make monthly payments during the loan term, like a standard interest-only mortgage.
Common uses of bridging loans
What are some of the common uses for bridging loans and what would be considered a suitable choice for such a loan?
Buying a new home before selling your current one
Buying a new home when you still need to sell your current one can make things challenging financially. However, a bridging loan can be a great help in this situation, preventing the property chain from collapsing. It allows you to move quickly as a cash buyer.
Buying property at auction
Buying property at auction will usually require the buyer to complete the purchase in a strict timeframe and that may be too fast for a lot of traditional mortgage agreements.
Purchasing unmortgageable property
On some occasions you may come across property that’s deemed unmortgageable and as a result, bridging finance allows you to buy these dilapidated properties and renovate them untl they qualify for a standard mortgage.
Property investment and development
Investors will use these bridging loans to help fund renovations, conversions or new builds, especially if the plan is to sell the improved property for a profit, or to refinance onto a buy-to-let mortgage.
Covering urgent expenses
Bridging loans can be helpful when needing to cover urgent expenses and providing quick capital for business cash flow, time-sensitive needs or tax bills.
Bridging loans can certainly be helpful to have, so if you’re considering this type of loan in particular, it’s worth exploring them when it comes to financing options.
