Bridging Loans Guide for Borrowers
A bridging loan is a borrowing option which 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.
Bridging loans can be used in numerous circumstances, meaning it is a helpful source of funding for many people.
It is therefore important to understand how bridging loans 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 back on the date given to them.
Regardless of the type used, lenders will need to understand how the loans will be repaid, and so a repayment strategy will need to be outlined.
Due to this, it is particularly important for individuals to assess whether this is an affordable and suitable funding option for them prior to taking out the loan.
What can a bridging loan help with?
Bridging loans can help individuals in a variety of different situations. These include:
- Auction purchases
- Securing a property quickly
- 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, a bridging loan can have either a fixed or variable interest rate.
With a fixed rate, individuals will be paying back the same amount of interest over the duration of 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 personal 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.
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 a bridging loan 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, bridging loans also use 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.
In summary, bridging loans can effectively help individuals secure the loans they need to complete their financial plans.
Although this is positive, individuals must assess all their options prior to taking out this type of loan to ensure they implement a suitable method for their needs.