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If you're in the process of buying a new property or looking to complete a property development project, you may have come across the term "bridging finance" or "bridging loan".
This form of finance has become increasingly popular in recent years, as more and more property investors and developers seek short-term funding solutions. In this blog post, we'll take a closer look at what bridge loans are, how they work, and the pros and cons of using them.
What is a bridging loan?
A bridging loan, also known as bridge finance, is a short-term finance solution that's used to bridge a gap between two larger financial transactions. In the context of property investment and development, bridge loans are often used to cover the gap between the purchase of a new property and the sale of an existing property, or to fund property development projects until longer-term finance can be secured.
Bridging works best if you are “flipping” a property or need to “break the chain”. For example, you are a property investor who wants to purchase a property quickly, typically at auction and do it up for a quick sale, bridging is perfect!
However, if you are a first time buyer looking to purchase your residential home a bridge isn’t for you.
How do bridging loans work?
Bridging loans are typically secured against property, either residential or commercial. Lenders will consider the value of the property being used as collateral, rather than the borrower's credit score or financial history, when deciding whether or not to lend. The amount that can be borrowed through a bridge loan will depend on the value of the property being used as collateral and the borrower's ability to repay the loan.
Bridge loans are typically short-term, with terms ranging from a few weeks to a few months. It is possible to get an opened bridge, see our guide for more information. Interest rates on bridge loans are typically higher than those on traditional mortgages or other forms of finance, reflecting the higher risk involved in lending for short periods of time.
WARNING: If you are in a fixed term bridge and are unable to exit the bridge by the expiry date you could face significant fines from the lender and in the worst case your property and any other property used as security could be repossessed.
When the loan term ends, the borrower will need to either repay the loan in full, or refinance the loan with longer-term finance such as a traditional mortgage. If the borrower is unable to repay the loan or refinance, the lender may take possession of the property used as collateral.
Pros and cons of bridging loans
Like any form of finance, bridging loans have their pros and cons. Here are some of the key advantages and disadvantages to consider:
- Quick access to finance: Bridge loans can be arranged quickly, often within a matter of days, making them ideal for property investors and developers who need to move quickly to secure a deal.
- Flexible terms: Bridge loans are often more flexible than other forms of finance, with lenders able to offer bespoke terms to suit the borrower's needs.
- Not always a credit check: As bridge loans are secured against property, lenders may be more willing to lend to borrowers with a poor credit history.
- No early repayment penalties: Unlike some longer-term loans, bridge loans do not typically come with early repayment penalties, allowing borrowers to repay the loan early if they are able to.
- Open-ended options: There is no set expiry date
- Rolled up or serviced interest: You can have the interested deducted from the net amount, added to the final balance to repay at the end of the bridge or service the interest month
- High interest rates: Interest rates on bridge loans are typically higher than those on traditional mortgages or other forms of finance, reflecting the higher risk involved in lending for short periods of time.
- Short repayment terms: Bridge loans are typically short-term, which can put pressure on borrowers to repay the loan quickly or refinance with longer-term finance.
- Risk of repossession: If the borrower is unable to repay the loan or refinance, the lender may take possession of the property used as collateral.
- Complex terms and fees: Bridge loans can come with complex terms and fees, which can make them difficult to understand and compare.
- Unregulated: Bridging loans are not regulated mortgages.
What can I use a bridge loan for?
Bridge loans can be used for a variety of purposes, including:
- Property purchases
Bridge loans can be used to finance the purchase of a new property before the sale of an existing property has been completed.
- Property development
Bridge loans can be used to fund property development projects, such as renovations or conversions, until longer-term finance can be secured.
- Auction purchases
Due to the quick nature of a bridge they are ideal for investors purchasing property at auctions.