What is a Bridging Loan? Complete Guidance

When you want to buy a property while your existing property is in the process of selling, it can be not easy to tie up both dates to complete both transactions simultaneously. Or you may win a bid at auction and don't have funds ready on time. This is where a bridging loan comes in. It provides quick funding so that you can fulfil your emergency financial obligation. 

You can get such loans from specialised bridging lenders or p2p lending platforms. Here in this guide, we will explain everything you need to know about bridging loans. 

What Is A Bridging Loan? 

Bridging loans are a short-term funding source. They are generally used to bridge the gap when you are waiting for a long-term fund to become available. Unlike mortgages, bridging loans take a small time to the arrangement. So, it can be a perfect solution if speed is important.  

Here are some scenarios where you can consider bridging finance: 

• Your property chain has collapsed, and you do not want to lose your dream property. 

• You want to buy a property at an auction and need quick funding. 

• When buying an unmortgageable property and planning to make it habitable, you can arrange a traditional mortgage on it. 

Bridging loans are secured loans, which means you have to use an asset as a security against them. Since there is a risk of repossession, most people think of it as a loan of last resort.  

How Does Bridging Loan Work? 

You can take out an amount between £50,000 and £10 million from a bridging loan provider. However, the amount you can borrow varies from lender to lender. Most bridging lenders offer a maximum loan to value-of 75%. If you want to take out a large sum of money, you can put multiple properties as security. 

Bridging lenders usually do not consider your income and credit score; they are only concerned with your exit strategy and the value of your property. 

You can repay your loan by selling a property or financing through a traditional mortgage.  

Pros And Cons Of Bridging Loans 

It is essential to find the pros and cons of bridging loans so that you can choose if it is the right option for you or not. 

Pros Of Bridging Loans 

Bridging finance comes with numerous advantages, some of which are as follows: 

• You can get quick access to funds to keep your transactions on track. 

• It allows you to borrow a large amount of money. 

• Bridging lenders offer flexible repayment terms to meet your needs. 

• It is possible to secure a loan against a property which is not acceptable by high street lenders. 

Cons Of Bridging Loans  

Like all other financial products bridging loans have some drawbacks that you must consider: 

• Bridging finance is secured financing, so you have to put an asset as a security against the loan. And if you default, you will lose that asset. 

• The interest rate of bridging loans is higher than standard bank loans. 

• Bridging finance comes with a range of additional charges, increasing the borrowing cost.

What Are The Interest Rates Of Bridging Loans? 

Due to the short-term nature of bridging finance, you are paying for the privilege of borrowing money quickly. Bridging lenders charge interest rates daily instead of annually. Typically, the APR ranges from 6% to 20%, depending on the loan amount you want to take out. It is higher than the interest on mortgage loans, so you must shop around to find a lender offering competitive rates. 

However, in a traditional mortgage, there are three different ways that the interest on a bridging loan is charged: 

Monthly: It is similar to an interest-only mortgage, where you have to make monthly interest payments. 

Retained: in this way, you can borrow interest for an agreed time, and when you repay the loan amount, unused interest is returned to you. 

Rolled up: interest amount is added to the loan amount and paid at the end of the loan terms.

What Is The Cost Of a Bridging Loan? 

Besides the interest rates, bridging loans have many additional charges you must keep in mind while calculating their cost. These charges include:

Administration fee: it is usually paid upfront. 

Arrangement Fee: most lenders charge this fee, typically 2% of the loan amount.  

Valuation Fee: this fee is charged for the valuation of your property, and it varies depending on the lender. 

Legal fee: it is a solicitors fee, and a part of it is paid upfront, and the remaining is paid on completion of the loan. 

In addition, if you take out a loan through a broker, you have to pay the broker's fee too. All these fees add up to your loan amount, so you must check these when choosing a lender. 

How To Get A Bridging Loan 

It is straightforward to apply for a bridging loan. First, you have to choose a lender and make an online application. Provide all the necessary information required by the lender and keep all the documents ready to get fast approval.  

The lender will assess your loan application depending on different things, and the most important thing is your exit strategy and your security property. If you meet the eligibility criteria, you can get quick approval and find deals at an affordable rate. 

Conclusion 

Bridging finance is getting popular all across the UK due to speed of arrangement, flexibility and many other benefits. It provides you with quick funding compared to traditional mortgages and has less rigid eligibility criteria. However, it is always essential to look beyond flexibility so that you can make the right decision.

Always remember that bridging loans are short-term loans with a high-interest rate. If you can not afford to repay the loan, do not go for a bridging loan. Otherwise, you may end up in an adept cycle and can not come out of it. You should understand every aspect of a bridging loan so that you can choose whether you can afford to take it or not.