What is a bridging loan?
This guide will explain everything you need to know about bridging loans, including the main pros and cons.
What is a bridging loan?
Most people don’t have a significant amount of liquid cash that can be accessed immediately, even if they do have the funds to make a purchase. That’s what bridging loans are useful for; they provide a way to access funds in a shorter timeframe. It is a useful option if you’re waiting on funds from another property but there is a delay in completion, for example.
Bridging finance can also be useful if you’re seeking fast-paced auction finance or trying to purchase an extremely in demand property, like a bungalow. It ensures the only property-backed businesses or buyers who can secure the sale before you are cash buyers, who are few and far between.
A bridging loan works by giving you the money to proceed with a purchase while you free up money from other assets / investments or secure a long-term finance plan, such as a buy-to-let mortgage. They’re a handy way to access short-term cash injection, while you put a more sustainable plan in place or liquidise assets.
How do bridging loans work?
There are two key types of bridging loans with one key difference. Closed bridging loans have a fixed repayment date, which is typically set for the completion date of a property purchase. An open bridging loan, meanwhile, doesn’t have a set repayment date, but should be paid off swiftly over the course of no more than a year. To help a broker find you the best deal, you’ll need to have a plan that shows you’ll soon have the means to pay it off (such as proof that another property sale is just waiting for completion).
You might also hear the terms first charge (unmortgaged properties) or second charge (mortgaged properties), which relate to how your property is used as a security against the amount you borrow. If you defaulted on your first charge bridging loan and had to sell your home, the loan would be paid first, while a second-charge loan would prioritise your mortgage.
How much does a bridging loan cost?
This will depend entirely on the amount you borrow and the interest rate on your loan. Some lenders can offer 100% of the money needed depending on the security offered, but typically lenders will offer 80% loan-to-value. Working with a skilled and experienced broker can help you access the most preferential rates and keep the costs down.
Advantages of bridging loans
Most people’s wealth is tied up in investments, ISAs or property, meaning it cannot be accessed immediately. Buying or selling a property can be a complex process, with lots of potential for delays. Finding a broker who can secure a bridging loan will stop your purchase falling through and give you the funds you need until you can implement your long-term borrowing or payment plan. It puts you at the front of the queue, minimising the chance of missing out on your dream property.
Drawbacks of bridging loans
While bridging loans are a handy way to access short-term funds, they’re not as cost efficient as other products in the long term. Interest is calculated on a monthly rate, as bridging loans are not designed to be held for more than a year, which can increase costs as time goes on. If you need longer-term financial support, your broker can help you find a more suitable option.
Alternatives to bridging loans
If a bridging loan isn’t the right fit for your circumstances, or you don’t qualify, there are a number of other options. You could remortgage any existing properties to get extra cash without the high interest rates.
If you’re buying with the intention of renting a property, you could also look into a buy-to-let mortgage; you’ll just need to make sure you already have a broker like Newable Finance lined up to meet the tight deadlines of auction purchases. Alternatively, you could consider asset refinancing (freeing up the cash held up in valuable assets) or invoice financing (selling off unpaid invoices to access their value quickly).
Find the right lender with Newable Finance
Newable Finance makes it simple to find the right lender for your financial needs. Find out more about our bridging loan lenders, and start the application process today. And if that’s not the right option for you, our expert brokers can help you fund your property purchase, refurbishment or tax bill with another affordable finance option.
Find out more about how Newable Finance can help you become #FinanceConfident.