A bridging loan is more often than not used in real estate, for example, when someone purchases a property or house and is in the transitional phase between settlement and moving day, they might require cash flow while they wait for the funds to come through. They are short-term loans, usually six months to one year, that are repaid when guaranteed funds are deposited to the borrower.
How Does a Bridging Loan Work?
Bridging loans in the UK are loans predominantly used by homeowners that require extra funding. Because buying a home can be expensive, many find themselves needing cash fast - which a bridging loan as a short-term loan may help.
Borrowers can apply in-person or online for a bridging loan to get the money they require. This type of short-term loan is typically secured against a borrower’s home. Hence, lenders require what is known as ‘collateral’; collateral gives lenders peace of mind that if the money is not repaid on time or in full, they have some form of security. If the bridging loan is not repaid the borrower risks losing their home.
How Much Does a Bridging Loan Cost?
These loans can range from £50,000 to £10 million, which is why this loan is not surprisingly popular with investment companies who might be seeking fast cash to establish their building sites.
Bridging loans, furthermore, are not linked to a person’s income and are often linked to an asset, such as a property. They are considered ‘speciality financing’ rather than a mortgage. Although this is the case, other factors will be considered, including a person’s credit score, credit history and debt-to-income ratio (DTI).
Therefore, the cost of a bridging loan will entirely depend on the lender and borrower in question. Those with good credit ratings in the UK may find that they are offered better interest rates, hence, making their bridging loan more affordable.
Are Bridging Loans a Good Idea?
Before borrowing a bridging loan, or any other type of long-term loan or short-term loan, you must consider both the potential pros and cons. While a bridging loan may be a great way to get funding quickly, it may not be the best type of loan based on your financial circumstances.
Below, find some of the common advantages and disadvantages to bridging loans which may help you better decide if a bridging loan is right for you:
The Advantages of bridging Loans
As mentioned above, bridging loans are primarily used for people interested in real estate transactions, so there are many benefits of this loan type:
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Quick Way to Get Cash: Bridging finance lenders will often approve your loan quickly, to ensure your financial needs are met swiftly. This means you won’t have to wait for the sale of your property before purchasing your new one.
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Give a Property Buyer the Upper Hand: If you’re buying in a good market and need financing fast to ensure you get your hands on the ideal property, it might save you money.
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Flexibility: A bridging loan will allow a buyer more time to look around for the perfect property deal in the market. It reduces the time constraint a buyer without the loan would have.
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Good Repayment Plans: There are often flexible repayment plans with this loan type, and don’t require monthly repayments- at least for the first few months. This makes a bridging loan incredibly manageable to repay, as you will often be required to repay the full amount, alongside the interest rates, at once.
The Disadvantages of bridging Loans
There are, of course, some important points to consider before taking out a bridging loan, as with any loan. The biggest consideration is that a bridging loan is unique and works in a way where it uses your assets as collateral, which if well-planned and thought through, often has no errors. However, it is a risky type of loan for a handful of reasons and here is a list of some important things to contemplate before applying:
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High-Interest Rates: A bridging loan usually has high-interest rates, around 8.5%-10%. If a person cannot repay the loan, this may trap them into a debt cycle, making it extremely difficult to repay.
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Short Repayment Plans: The short repayment plans could be disastrous if the original sale of a house doesn’t happen as expected, in turn leaving a person at a stand-still with their asset and no way to repay such a large amount of money.
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High Transaction Costs: As a person is asset rich and not considered financially rich, the money lender will often implement high transaction costs.
How to Apply for a Bridging Loan
For those interested in applying for a bridging loan, understanding the key steps involved can simplify the process. Here's a concise overview of the key steps involved in applying for a bridging loan:
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Research lenders: Begin by researching various lenders, such as banks, private finance companies, or specialist bridging loan providers, to find the one that best suits your needs and offers competitive rates.
- Determine loan requirements: Assess your financial situation and property details to determine the loan amount, repayment term, and any specific requirements you may have, such as the need for a closed or open bridging loan.
- Gather documentation: Compile the necessary documents, including proof of identity, proof of income, property valuation, details of your exit strategy, and any other relevant paperwork that the lender may require.
- Submit application: Complete the lender's application form and submit it along with the required documentation. Ensure all information is accurate and up-to-date to avoid delays in processing.
- Await approval: After submitting your application, wait for the lender to review it and conduct their due diligence, including credit checks and property valuation. This process can take anywhere from a few days to a few weeks, depending on the lender.
- Review loan terms: If your application is approved, the lender will provide a loan offer with terms and conditions. Carefully review these terms, and seek legal or financial advice if necessary, before agreeing to them.
- Complete the transaction: Once you agree to the loan terms, the lender will arrange for the funds to be transferred, and the bridging loan process will be complete. Ensure that you repay the loan according to the agreed-upon schedule to avoid penalties or additional interest charges.
