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Not many of you might have heard the term ‘bridging loans’ but you’ll be surprised to know that this type of loans are quite common, and in fact, quite useful! This post will shed some more light on bridging loans – what exactly they are, when you should opt for one and the pros and cons as opposed to other types of loans.
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What Is A Bridging Loan?
A bridging loan is a short-term, quick-fix loan that helps ‘bridge the gap’, especially in terms of housing and property. It helps real estate and property investors fund their projects or helps people put in the deposit towards their new home before selling their old one. In essence, bridging loans help finance the gap between when you need to pay to purchase something, but you’re still waiting for funds to become available from the sale of something else.
What Can A Bridging Loan Be Used For?
The flexibility of a bridging loan means it can be used by property investors for a number of purposes, some of which include:
- Purchasing a property/ house at an auction
- Securing a residential or commercial site or a plot of land for future development
- Buy-to-let investment purposes
- Refurbishment projects on investment properties for rent
- Business ventures
How Does A Bridging Loan Work?
There are two types of bridging loans – ‘open’ and ‘closed’. With a closed bridging loan, there is a fixed date for repayment, whereas with an open bridging loan, there is no fixed repayment date. However, you will be expected to pay off the loan within a year.
So, for instance, if you have exchanged contracts but are just waiting for the sale of your property to go through, then you can get a closed bridging loan. Either way, the lender will need to see some evidence of a clear repayment strategy (taking out a mortgage or using equity from a property sale) as well as evidence of the new property you are going to purchase and whether your current property is in the process of being sold. Bridging loans are always secured loans which means you have to have a high-value asset such as property or land, to secure one.
How Do I Get A Bridging Loan?
Bridging loans aren’t usually provided by banks, so you would need to approach a specialist lender. The process is then similar to any other mortgage application and includes a valuation, underwriting and legal process.
Things To Consider Before Choosing A Bridging Loan
There are a few things you’ll need to consider when opting for a bridging loan::
- How much you want to borrow
- How much your property is worth, as this affects how much you can borrow and the bridge loan rates you’ll get.
- How long you need to borrow for. Bridging loans can be as short as one month, to as long as two years.
- Whether you have a mortgage on your property; this will affect how much you can borrow through a bridge loan.
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