Bridging Loans

A Bridging Loan is a short-term loan, typically taken out for a period of a few months pending the arrangement of longer-term financing such as a mortgage.
Pros

  • If you haven’t sold your property and need to buy your next one now, a Bridging loan can enable you to do this.
  • Quick – can often be arranged within a few days.
  • Flexible – can be paid off as soon as you are able to.
  • Bridging Loans can be a cost effective option if only used short-term.
  • An alternative when mainstream mortgage lending is not available.

Cons

  • Expensive. There may also be Set-up and Exit fees.
  • Circumstances could prevent you from paying the loan off within the planned timescales, causing financial difficulty.
  • Short term – if not repaid within the agreed term, a Bridging Lender can repossess the property.

How it works

You will be required to give security for the loan – normally the Bridging Loan company will allow the loan to be secured on a property, and typically will advance up to c.70% of the property value.

In most cases a Bridging Lender will require the security property to be unencumbered (i.e. without a mortgage or secured loan on it) although some companies will lend with second charge security, albeit at higher rates.

Rates are typically around 1% per month. With Set-up fees (often equivalent to a month’s interest), Broker fees (unless you deal with the Lender direct), a Valuation fee, Legal fees and Exit fees you might pay 15% or more if you bridge for 1 year.

You will probably have the option of paying interest on a monthly basis or rolling it up and paying it all when you redeem the loan. If you roll it up you will pay more due to compounding.

Loans are typically available for periods of 3 months to 3 years.

Why use a bridging loan

The most common reason for someone to take a Bridging Loan is because they need to complete on the purchase of a property before they’ve sold their existing one. It might be because whoever is buying their property can’t complete the purchase quickly enough, and delay will result in losing the new property.

The biggest risk with bridging loans is not having the funds to repay it.

Interest will continue to accumulate and you are at a real risk of the Bridging Lender calling in their security if you default on repayments or don’t pay the loan back within the specified term.

Bridging loans should only be taken out if you are very confident that you can absorb the extra cost and pay off the loan within the term.

If you have any doubt, and don’t have access to other funds to repay it, it is a high-risk strategy.

By Richard Watters

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