A bridging loan is a borrowing option that focuses on helping individuals who require short-term funding.
These loans can aid people who need to bridge the gap until they secure longer term finance.
For example, if an individual wants to purchase a new property, but has not yet sold their existing house, a bridging loan could be useful.
They can be used in numerous circumstances, meaning it is a helpful source of funding for many people.
It is therefore important to understand how they work and how they differ from other borrowing options available.
What are the different types of bridging loans?
Bridging loans can be open or closed. The difference between these types is the repayment dates given.
An open bridging loan does not have a fixed repayment date, however, most lenders will typically expect the loan to be repaid in a year.
Whereas, a closed bridging loan has a fixed repayment date, meaning that individuals will be expected to repay the loan on the date given to them.
Regardless of the type used, lenders will need to understand how the loans will be repaid, so an exit strategy will need to be outlined.
Due to this, individuals need to assess whether this is an affordable and suitable funding option for them before taking out the loan.
What can a bridging loan help with?
These loans can help individuals in a variety of different situations, including:
- Auction purchases
- Securing a property quickly or breaking a property chain
- Light or heavy refurbishments
- Purchasing uninhabitable properties
- Where a short lease property cannot be funded in a conventional way
- Capital raising
- Development funding
- Land purchase pre-planning
- Gifted transactions
- Covering cash flow needs
- Conversions and title splits
- Site acquisition
- Planning applications
What type of interest rates are available for bridging loans?
Similar to other types of loans on the market, they can have either a fixed or variable interest rate.
With a fixed rate, individuals will be paying back the same amount of interest throughout the loan.
Whereas, a variable rate means that the level of interest paid back will fluctuate, depending on the Bank of England’s base rate.
The amount of interest charged will also depend on the lender’s assessment of your affordability.
This means that factors related to your circumstances, including your credit history may impact the amount of interest you pay back overall.
What are the benefits of a bridging loan?
Bridging loans allow individuals to raise the funds they need quickly, which can be beneficial when you are on a tight timescale. If you want to know how to speed up the process further read our guide to fast bridging loans.
Additionally, they are often considered to be a more flexible source of funding in comparison to mortgages, as they can be used for multiple different purposes.
Getting this option may therefore be positive for some people, however, it is always important to assess the risks the loan entails to determine if it is a suitable course of action.
Risks of a bridging loan
Similar to secured loans, this option also uses your property as security. This means that if you fail to meet your repayments then your property could be repossessed by the lender.
Individuals must therefore consider their options carefully and organise an affordable and suitable repayment strategy, to ensure they do not default on their repayments.
Conclusion
In summary, bridging loans can effectively help individuals secure the funding they need to complete their plans.
Although this is positive, individuals must assess all their options before taking out this type of loan to ensure they implement a suitable method for their needs.
Any property used as security, which may include your home, may be repossessed if you do not keep up repayments on your mortgage.
