How Does A Bridging Loan Work?

How Does A Bridging Loan Work?

- in Bridging loan, informational blog
bridging loan work

A bridging loan is a type of short-term loan usually taken out for a few weeks, months, or a year until long-term finance is arranged. It is a secured loan and is also called an additional loan that borrowers take on top of their existing home loan. It means that a bridging loan provides you funds during a period when you are trying to sell your current home to complete the purchase of a new home. Such loans are expensive as compared to traditional loans. However, these loans are taken for a short amount of time, so the overall cost is still lower than the loans that charge interest rates for 20 to 25 years. 

Here we will describe everything you need to know about these loans and also how they work. 

How Does Bridging Finance Work?

Bridging loans are most commonly used for buying a home or investing in property. For example, if you need to buy a new home but are waiting for funds to become available by selling an existing property. It may take longer to sell your existing home if you do not find a buyer or in completing the paperwork formalities. In such circumstances, a bridging loan can be a perfect solution. In a bridging loan, you can get money by using your old home as a security and then use this as a deposit for your new home or property. You are expected to repay the loan amount shortly as soon as your property is sold.  

Typically a bridging loan is taken for buying a property, but you can also use it for some other purposes that include:

  • Property renovation or refurbishment
  • Purchase of property at auction
  • Complete development of property
  • Solve business cash flow problems 
  • Pay tax bills or divorce settlements
  • Invest for buy-to-let purposes 

For How Long You Can Take A Bridging Loan? 

A Bridging loan is a short-term debt, so usually, you have to pay it within a year. However, many providers also offer loans for up to 36 months. Usually, there are two types of bridging loans, and the repayment terms and date depend on the type of loan you are taking. If you choose an open bridging loan, there is no fixed repayment date in it. This type of loan is best for you if you are not uncertain about the availability of long-term finances. On the other hand, if you select a closed bridging loan, it has a fixed repayment date, and you also need to tell the lender about what funds you will use to repay the loan amount. Closed bridging loans have more acceptance rates and low interest rates than open bridging loans. It is because the lenders find closed bridging finance a secure option as they have a repayment date and exit plan.  

How Much Can You Borrow From A Bridging Loan?

Bridging loans tend to start from £25,000 and can go up to £100 millions. Several factors can affect the amount that you can borrow:

  • The lender you choose to get a loan.
  • The value of the property that you are using as security. 
  • Location of property.
  • How much equity you have in your home. Most lenders offer up to 75% Loan To Value on your property. 
  • You can borrow more if you are taking a first-charge loan.

The interest rate on bridging loans is higher than the standard home loan; it means that it is a costly option. 

Potential Pros And Cons Of Bridging Loan:

Before choosing any financial option, it is essential to look at its pros and cons. To help you out here, we are providing you with the possible pros and cons of bridging loans.

Pros Of Bridging Loan:

Quick to Arrange: Bridging loans especially, commercial bridging loans, are quick and easy to arrange because they are unregulated. For property deals that are dependent on such loans, the speed of funds to become available is very important.  

Convenience: Bridging loans allow you to complete property purchase straight away instead of waiting for funds to become available by the sale of existing property. 

Repayments: In bridging loans, you have the option to pay the interest rate at the end of the loan term. In this way, your monthly cash flow is not disturbed, and you can pay the loan amount and interest after the sale of your property. 

Available for Diverse Situations: As the mortgage is generally available for only habitable properties, bridging finance is available for refurbishment and development projects for the land where even nothing has been built yet. 

Avoid Renting: if the timing of bridging loan and sale/purchase of property is right, you can prevent yourself from the hassle of renting out your existing property before the sale of the existing home and settlement of a new home. 

Cons Of Bridging Loan:

High-Interest Rate: the interest rate on bridging loans is usually higher, i.e. 1 to 1.5% per month, and it works out as a 6 to 19% Annual Percentage Rate. Moreover, as the interest rate is charged monthly, the more time it takes to sell your property, the more interest you have to pay. 

Risk Of Repossession: In a bridging loan, you have to use any of your property as security. If due for any reason you fail to repay the loan amount, the lender can sell your property to get his amount back. 

Range Of Fees: Lenders charge several fees that you must keep in mind before taking a loan. These fees include a setting up or arrangement fee, valuation fee, legal fee, administration fee, and broker fees. 

We hope that this article will help you understand how bridging loans works, their benefits, and their risks. Now you can make an informed decision whether you want to take bridging loans or not. Another thing you want to keep in mind is always choosing a well-known and highly reputed lender that has a good track record. Use comparison sites to compare bridging loan providers and select the one that meets your requirements.



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