Is Bridging Loan Right for Me?
Bridging loans are increasingly becoming popular amongst homeowners and property developers across the UK as it is one of the fastest and most convenient ways to access funds. But, is it the right solution for you? Taking out bridging finance largely depends on what you want to do with the bridging loan, for how long you need and whether you have a strong exit plan.
In this article, we will go through what bridging loans are, how they work and what are their pros and cons, so it can help you in deciding if bridging finance is right for you.
What is a Bridging Loan and What it is used for?
A best bridging loan in London is a short-term financial instrument that offers a fast and flexible way to raise funds while you wait for a longer-term funding solution, such as completion of a property sale, a mortgage or business income. As the name suggests, bridging loans are used to bridge short-term financial gaps.
The two major requirements for taking out a bridging loan are security and an exit strategy. The security is typically in the form of property or assets, and the exit strategy defines when and how you will repay the loan when the term ends.
Some common circumstances when bridging finance can be useful to you:
- Purchase a property at auction
- Purchase distressed building
- Carry out property refurbishment work
- Buy a new home before selling the current one
- Prevent a property chain collapse
- Secure a great business deal when time is crucial
- Expand business premises
- Buy expensive commercial equipment
- Pay inheritance tax
- Secure planning permission for property development
What Make Bridging Loans Different from Mortgage Loans?
The key difference between bridging loans and mortgage loans is the duration of time they are used for. A mortgage loan is taken for the long term while a bridging loan is used for short term. Mortgage loans are usually used to purchase a property and the loan is repaid over a longer period. On the contrary, bridging loans are used to fund a property quickly before it is refinanced to a longer-term mortgage.
Since bridging loans are short-term loans, they have much higher interest rates and additional charges compared to traditional mortgage loans. You will pay interest only when you repay the loan. So, if you wish to exit the loan sooner than the time fixed, you could save money.
Another great selling point of bridging loans is how repayments function. Unlike a traditional mortgage, there is no need to make monthly payments with bridging loans. Rather, the total amount along with the interest is paid as a lump sum after the term ends.
Here are some most common ways to repay a bridging loan:
- Selling another property or assets
- Refinance to a standard mortgage for a longer-term
- Selling the property after you have done renovations using a bridging loan
- Any upcoming large payment
What is the Costs Involved with Bridging Loans?
The cost of a bridging loan depends on a range of factors, such as the total loan amount, the term of the loan and the lender you choose. Interest rate varies from lender to lender, but it mainly depends on your credit history, the LTV ratio and the value of the property used as security.
Besides interest rates, other fees that may be included in the bridging loans:
- Arrangement fees – It is a fee charged by the lender for processing your application and setting up the loan. This may be a flat fee or a percentage of your loan.
- Valuation fees – It is a fee charged by the lender for the valuation of your property.
- Legal fees – Some lenders will require you to pay legal fees, while others will include this cost in the loan.
- Broker fees – Some people consult a specialist financial broker to help them find the best bridging loan lender at the best rates. In such cases, a fee will apply.
- Exit fees – Some lenders will also charge an exit fee when you repay the loan, which is usually a percentage of your loan value.
A bridging loan calculator will help you simplify the process by providing an indicative quote and what other expenses to expect while applying for the loan.
The Pros and Cons of Bridging Finance
Although bridging finance is useful in many circumstances, it has its own set of pros and cons, which you need to consider before applying.
Pros:
Fast access to funds – Bridging finance can be approved and accessed much more quickly than any other traditional mortgage loan. This makes bridging finance a great option when time is of the essence.
Higher loan amounts – A bridging loan can allow borrowers to borrow up to 80% to 90% LTV ratio. In rare circumstances, a 100% bridging loan is also possible.
Flexibility – Bridging loans can be tailored to meet the borrower’s particular requirements, with options for first or second-charge loans, open or closed loans and more.
Flexible repayments – Bridging loans allow borrowers to either pay only the interest on their loan until the sale of the property or don’t make any repayments during the loan term and pay the entire amount along with interest at the end of the term.
No early repayment charges – Mostly there are no early repayment fees if a borrower plans to pay off the loan before the end of the term. Meaning, they can make early repayments without incurring any additional charges.
Cons:
Higher interest rates – Since bridging loans are a fast and flexible form of financing, they have typically higher interest rates compared to traditional mortgages.
Short-term nature – Since bridging loans last for a relatively shorter duration, it can cause a problem if the property doesn’t get sold or redevelopment project doesn’t complete on time.
High risk loan – If the borrower fails to repay the loan on time, there is a risk of losing the property.
Fees – Bridging loans come with several other fees, such as administration fees, legal fees, and so on, which ultimately adds up.
Therefore, if you are planning to apply for the bridging finance, it is advisable to weigh these pros and cons, and compare terms and interest rates from different lenders before settling for one.
Is Bridging Finance The Right Solution for Me?
The speed, flexibility and certainty offered by bridging finance give borrowers an edge over those who have taken traditional loans. Although bridging finance is an excellent option for the short-term, one should bear in mind that they are much more expensive than standard loans. Plus, if you don’t keep up with regular repayments, your property may be repossessed by the lender.
It is strongly advised to seek help from a bridging loan expert who can help you understand all the nuances and the terms of the loan, and whether the bridging loan is the only feasible option.