Bridging loans are an often misunderstood and important tool for those looking to raise finance for a property purchase. Often ignored due to the fact that they come with higher interest rates than those offered on mortgages, many are missing out on an excellent finance tool.
In this guide, we break down what a bridging loan is, how they work and how to make sure you get the best deal when taking one out.
What is a bridging loan?
A bridging loan is a short-term, property-backed loan that is usually taken out for a maximum of 18 months. When secured against your own home, or a property that you or your family have ever resided in, your loan will be regulated by the Financial Conduct Authority (FCA). FCA regulated loans are restricted to a maximum term of 12 months.
Where can you get one?
They’re not usually offered by High Street banks, and haven’t been since they stepped away from the market during the credit crunch in 2007. The leading lenders tend to be challenger banks and specialist bridging finance lenders. Most lenders don’t publish their rates and detailed lending criteria online, so talking to a broker or using an online bridging loan comparison tool may be the simplest way to get started.
When are they used?
They can be used for almost any purpose, they are commonly used to maintain a place in a property chain, purchase property quickly – often at auction, and to fund property refurbishment projects. They can be taken out against residential or commercial property, and even land.
Lenders take a more flexible approach to lending than would be the case when taking out a mortgage, which makes them very popular among property investors and developers.
How do they work?
Bridging finance is arranged as an interest only loan, with the interest often added to the loan. This means there are no monthly payments to make, with the interest simply being paid in addition to the capital when the loan is repaid.
This removes the emphasis on your income when applying for the loan, with lenders instead focussing on your exit strategy – how you will repay the loan.
Common exit strategies include the sale of the property that the loan is secure against, or refinancing it to a residential or buy to let mortgage.
What are the pros and cons of bridging loans?
Pros
– bridging loans can be arranged quickly due to their streamlined application process. That means you’ll be well placed to raise funds quickly when looking to purchase or refinance a property.
– They can be arranged for almost any reason, meaning they’re a more flexible option than traditional mortgages.
– For borrowers with poor credit ratings, it is often easier to qualify for this type of finance where there is a strong exit strategy in place.
Cons
– Bridging loan interest rates are higher than those charged on residential and buy to let mortgages, although they have dropped in recent years.
– As they are a very short-term loan, they are often seen as higher risk as you could face repossession if you fail to repay the loan at the end of the term.
– Some unregulated lenders may charge higher fees and interest in the event of default, meaning it’s very important that you only work with reputable lenders.
Should I take out a bridging loan?
The decision to take out a bridging loan is a big one and shouldn’t be taken lightly. Whether it’s the right product for you depends on your own circumstances.
If you’re considering taking out bridging finance, you should put as much thought into your exit strategy as you do about taking the loan.
Without a solid exit strategy, you’ll be taking an undue risk that you’ll fail to repay the loan at the end of the term.
Due to the lack of understanding about this type of finance, it may be a good idea to work with an experienced broker who will ensure that you reap the benefits of bridging loans, while avoiding the pitfalls.
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