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Bridging finance is a short-term funding solution especially popular among property developers and business owners looking to expand their presence. Bridging loans help companies to meet their commitments by providing them with the required amount of money before they secure long-term financing.
Historically, bridging loans were considered a last resort for people who could not get money elsewhere. Today, however, a large number of providers are offering attractive opinions for lending. You can take out loans from specialized bridging lenders or p2p lending platforms.
So what is precisely a bridging loan, when should you consider it, what things to consider before taking a loan and how much can you borrow? Keep on reading this guide to bridging loans to find the answers to all these questions.
Essential Guide to Bridging Loans UK
What Is Bridging Financing?
A bridging loan or bridging financing is a type of immediate temporary financing solution that can cover the required cost until you secure long-term financing. The most common use of bridging loans is to purchase a property before the sale of an existing one. The name comes from the bridge because it bridges the financial gap and lets you fulfil your emergency financial needs.
There may still be a lot of mystery around bridging loans. However, the easiest way to understand is to consider bridging just as a short-term mortgage. However, it differs in some important ways that we will cover later.
The similarities in bridging loans and mortgages are as follows:
- The amount of the loan depends on the value of the real estate.
- Bridging lenders take charge of the security property, which means they can sell the property if you default on the loan.
- You have to pay interest on the agreed loan term and then pay the loan amount at the end of the loan term.
How does Bridging Loan Differ From a Mortgage?
The most significant difference is in the loan terms. You will often take out a mortgage for 25 years or more, but bridging loans are usually not longer than 12 months. The other important difference is in the cost. Currently, mortgage rates are under 5% for most borrowers. In contrast, the interest rate of bridging finance starts from as low as 8% and reaches up to 15%.
Here are a few other differences that allow you to use bridging loans in interesting ways:
- Generally, bridging lenders and p2p lending platforms are not concerned about your personal income, so you can secure a loan even if you have a low income.
- The property’s condition does not matter much, like in a commercial mortgage loan.
- Bridging providers are not bothered about the rental income that a property can produce.
- Bridging finance is arranged much more quickly as compared to traditional mortgage loans.
Types Of Bridging Loan
With the increase in demand, the number of bridging lenders and types of bridging loans is also increased.
Here are some common types of bridging financing:
Open Bridging Loan
These loans do not have any fixed repayment date, and these are good options for borrowers who need to know the exact date when they will have the necessary funds available. The interest rates of such loans are higher because of the risk.
Closed Bridging Loan
These loans have a fixed end date and are usually available for a fixed amount of time, which is agreed upon by both the lenders and borrowers. Because bridging lenders know when they will receive the repayment, these loans tend to have lower interest rates and are more likely to offer these loans.
First Charge Bridging Loan
A first charge bridging loan is that which uses a mortgage-free property as collateral. If you default on a loan, the lender has the right to sell your property to get the loan amount back.
Second Charge Bridging Loan
A fast regulated bridging loan is taken against a property that already has a loan against it. This type of loan has a higher interest rate than the first charge loan, and you also have to take permission from the first charge lender before taking out a second charge loan.
Why Use Bridging Loan?
We all know that bridging finance is an expensive way of borrowing compared to traditional mortgages. Now you may be thinking, why use a bridging loan if it is costly?
Sometimes you are in a situation where you can immediately get long-term funding to become available. For example, if you find your dream property on sale, you will never want to miss that opportunity.
Bridging finance provides quick funding to meet immediate financial needs. You can purchase a property at auction or refurbish a property to increase its value before the sale.
In addition, if your property is not mortgageable, it is almost impossible to secure a mortgage loan. Bridging lenders allow you to take loans against such properties. You can also take bridging financing to fund to overcome your business cash flow issues.
How Much Can You Borrow?
The amount you can take out is based entirely on the value of the property. Factors like your personal income, amount of rental income, condition of the property, and credit score do not come into it. However, lending criteria can be different for different lenders. You can get quick approval and the required amount of loan if you have a valuable property and a good exit strategy. If you want to take out a large amount, you can use more than one property as a security against the loan.
When you take out a bridging loan, you have to pay additional charges like administration, valuation, legal, and exit fees. All these charges add up to the borrowing cost making it an expensive way of borrowing.
Conclusion
Bridging loans are a short-term financing solution that is becoming popular due to their speed of arrangement and flexibility. Many peer to peer lending platforms also offer property-backed loans, and you can also find reputable bridging lenders to secure such loans. Although this type of financing offers numerous benefits, you should take out this loan only when you can afford to repay. Otherwise, you can not come out of this debt cycle. We hope that after reading this guide, you have a lot of information about bridging loans so that you can make a better decision.