What is a Bridging Loan?
Bridging loans are a type of short-term loan, typically designed to allow a bridging gap between due debt, such as purchasing a property, and the availability of credit, usually in the form of a mortgage. In some instances, a bridging loan is only used as a short-term loan, although these are much rarer and best save for those financially difficult periods.
Perhaps the most important aspect of bridging finance is how it allows property purchases in situations where it wouldn’t normally be possible. For instance, if a property sells at auction at a great price but a mortgage cannot be processed in time, then a bridging loan can be used to make the purchase while waiting for the main line of credit to become available.
Why Get a Bridging Loan?
The main reason people seek bridging loans is to help facilitate the purchase of new property before selling current property. By providing a short-term loan, buyers have access to funds needed to buy a new home before their current home sells, allowing them to buy their preferred property before it becomes unavailable.
Because of the nature loan, bridging loan interest rates are much higher than a mortgage, ranging from 1.5% to 4% per month. However, bridging loans allow buyers to bridge the gap (hence the name) between sales and completion dates, so can be invaluable in many instances.
For example, someone looking to make a quick sell-on of a property or purchase at an auction may find bridging finance loans essential to close the deal. This is because the credit provided is available much quicker compared to traditional lenders.
Understanding Bridging Loan Rates
As mentioned, one of the setbacks of a bridging loan is the rates of interest charged. For instance, the average monthly interest of a bridging mortgage is around 4%, meaning high annual repayment fees. Similarly, administration fees can become quite excessive depending on the loan provider.
So, when you consider taking out a bridging loan, you must always remember that the loan rates are much higher than a traditional mortgage. However, given it’s designed as a short-term loan rather than a mortgage, it’s less of an issue should the loan be quickly repaid, which most tend to do after selling older property or waiting for credit to clear.
Should I Use a Bridging Loan?
It depends on the situation, but there are many instances where a bridging loan is very useful. For example, landlords considering investing in more buy-to-let property may seek bridging loans to cover the initial investment, while it’s also commonly used for property investments and developments.
However, it’s worth nothing that many consider using bridging loans in place of traditional lending, especially given the lending reluctance of banks in the wake of the financial crisis. That said, it’s important to understand the bridging loan rate should you consider this, and always have an exit strategy.
An exit strategy refers to the method of paying off the loan entirely. For most people with a bridging loan, this come sin the form of a traditional mortgage that is gained down the line and then used to pay of the entire loan. Others sell their property outright.
Remember, this is a risky strategy, as not everyone gets cleared for a mortgage, so could be left with a much costlier loan over the long-term.
Finding a Bridging Loan
The best way to find a suitable bridging loan is to use online resources. Bridging loan calculators are widely available, and some provide a quick and easy way to get a quote from the top bridging loan providers.