Bridging loans: what they are and how they work

Bridging loans: what they are and how they work

Most people and many businesses don’t have significant liquid funds that can be accessed immediately. Many will have savings or investments that may take a while to turn into cash due to restrictions on withdrawals or the time required to sell items/shares/property and so forth.

The purpose of a bridging loan is to enable access to funds in the shorter-term. These loans are usually secured against property, but some lenders will accept other forms of security.

When might a bridging loan be needed?

Sometimes people want to buy a new property but are still awaiting the completion of the sale of another property or asset. A bridging loan can mean they don’t miss out on the property they want. Other uses could include buying at auction or funding significant development and refurbishment before selling. Businesses may consider a bridging loan if they need short-term working capital or when unexpected tax liabilities arise.

How does it work?

A bridging loan essentially works by making the funds available immediately to allow you to proceed with a purchase whilst you simultaneously set the wheels in motion to free up money from assets/investments or secure a long-term finance plan such as arranging a buy-to-let mortgage.

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Types of bridging loan

There are two main types of bridging loans: closed and open. Closed bridging loans have a set repayment date; often the completion date of a property purchase. Open bridging loans, meanwhile, are more flexible and do not have a specific repayment date but are usually expected to be paid off within a year.

How much does a bridging loan cost?

The cost is dependent on several factors, primarily the amount you borrow and the interest rate. Typically, lenders will offer 80% loan-to-value but some may offer 100% of the money you need. This depends on the security offered and the perceived level of risk. Lenders will also often charge an ‘arrangement’ or ‘product’ fee of between 1.5% and 3% of the loan value. The interest rates on bridging loans is high, usually calculated on a monthly rather than annual basis, and average between 0.4% and 2% per month

If you feel that your circumstances mean that a bridging loan could be useful, you may want to consult a specialist such as https://www.parachutelaw.co.uk/bridging-loan Parachute Law to determine your best course of action.

Advantages of bridging loans

The main advantage of bridging loans is that they can give you much quicker access to liquid cash should you need it to buy property or pay bills as a matter of urgency. It can be used as an interim measure whilst you deal with turning your investments/assets into cash. This can be invaluable, especially when moving home as it means you can offer cash up-front, making you a much more attractive buyer. Bridging loans may be a good option for people with poor credit as they are usually secured against the property so there is a lower risk to the lender.

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Drawbacks of bridging loans

The main disadvantage of bridging loans is that the interest rates are much higher than those on more traditional options such as mortgages. There are also various fees to pay.

Alternatives to bridging loans

There are a number of alternatives if a bridging loan doesn’t seem right for your particular circumstances or if you don’t qualify. These include remortgaging, standard secured or unsecured loans, credit cards, asset financing, or invoice financing.

Who offers bridging loans?

Some high street banks in the UK still offer bridging loans but they are mostly offered by specialist lenders via brokers.

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