What are Bridging Loans & How do They Work?
You might have heard the terms ‘bridging loan’ and ‘bridging finance’ being thrown around, but what are they, and could you benefit from one? If you’ve been seeking answers to these questions, look no further — here, we’re answering all your frequently asked questions on the topic.
Ready? Let’s get started!
What is a bridging loan?
It’s a loan designed to help you bridge the financial gap between selling and buying a new property. It can be used in other circumstances, but it’s usually used in real estate.
Let’s say you have a house to sell, it could take months, and you’ve already spotted an exciting new property project at auction. Instead of watching as the opportunity disappears, a bridging loan can help you secure the property. You can then repay the loan in one lump sum once the equity from your property sales comes through.
If you’re interested in learning more about how else you can use them, keep reading.
To secure the best bridging loan lenders, interest rates and repayment plans, it helps to get to grips with the essentials.
Here is a complete guide to bridging loans to help access the best bridging finance for your needs.
What is bridging finance?
Bridging finance is just another name for a bridging loan — the two terms are used interchangeably. So it’s still used as a temporary financial stepping stone to help property owners or property developers move quickly on new opportunities while their current property is in the process of being sold.
Are bridging loans different to bridging finance?
No, there is no difference between bridging loans and bridging finance. They are the same product. A loan is a type of finance, so a bridging loan is, you guessed it, just a type of finance. It helps you temporarily plug the gap between selling your current property and buying a new one — no need to wait around to complete the mortgage application process first.
What are the different types of bridging loans?
You can use a bridging loan in many different scenarios; here, we’re talking you through the eight most common types of bridging finance: regulated, property, housing and mortgages, funding, banking, business and commercial, closed and open.
Regulated bridging loan
You can take out a regulated bridiging loan if you (the borrower) will be living in the property or a member of your immediate family will be. However, it’s unregulated if you have taken out the loan for business purposes.
Property bridging loan
This is the most common type of bridging loan. Most people applying for this finance are using it to bridge the financial gap between buying and selling property. You’ll then repay the loan, usually all at once within four to 12 months. However, it’s important to note that a bridging loan isn’t suitable for long-term funding.
Housing & mortgage bridging loan
As a property owner or a property developer, the next house you buy might need a bit of renovating to get it up to standard. In this instance, your lender might be happy for you to take out a renovation or development bridging loan. Remember, a bridging loan isn’t the same as a mortgage.
Funding bridging loan
You can use your bridging loan to fund your property development ventures. These types of loans help developers expand their property portfolio quickly without being held up by lengthy mortgage applications. But you can use these loans to fund a variety of projects, including:
- Purchasing land
- Expanding or developing a business project
- To pay a tax bill while you wait for invoices to be cleared
- If you need money upfront as part of a divorce settlement
- Purchasing a buy-to-let investment property
- Purchase a property at auction
Banking bridging loan
You can secure a bridging loan from specialist lenders and mortgage brokers, but you can also approach high street banks like Barclays, Natwest and HSBC. Although you can secure this type of loan through a bank, you’ll still usually need to go through a loan broker to access them.
Business & commercial bridging loan
You can use a commercial bridging loan to secure a commercial property, for example, retail shops, warehouses, hotels, office buildings, multifamily housing etc. Remember, lenders will want you to clearly map out a clear exit strategy i.e. how you’re going to repay the finance once it’s due.
Closed bridging loan
With a closed bridging loan, you have a fixed repayment date, pre-agreed between the borrower and the lender. A closed loan is usually for when you’re waiting to receive money from the property you’re selling and have already signed the sale contracts.
Open bridging loan
With an open loan, there aren’t any fixed repayment dates with the lender, it’s more flexible. It’s important to understand that although there isn’t a fixed repayment period, the short-term nature of the loan means borrowers usually make the loan repayment in full within one year.
Are bridging loans expensive?
Bridging loans can be expensive. Why? Because of their short-term nature, lenders can’t make money on them like they can with longer-term loans. This means they recoup their money through high monthly interest rates.
If you repay your loan quickly, say, within the first two months, you’ll only pay two months’ worth of interest rates. If you take up to 12 months to pay it back, you’re looking at a pretty hefty interest rate accumulation.
Let’s use an example. You want to loan £100,000 over a period of two months, and the interest rate is 1.3%. That means you can expect to pay interest of £1,300 each month. This would take your total loan repayment to £102,600 — this amount doesn’t include fees (legal, valuation, and other).
Use our bridging loan calculator to get a rough estimate of your loan costs.
I am thinking about a bridging loan, what are the next steps?
Now you’ve got a basic understanding of what a bridging loan is and how they work, it’s time to compare lenders. Before taking out any finance, you must understand the deals currently available to you and work out whether you can realistically afford to repay the loan in a short period of time.
Luckily, here at Bridging Loan Directory, we’ve partnered with trusted lenders to help you see what’s currently available to you.
We’re here to help you get answers to your bridging finance questions, so please don’t hesitate to reach out to our friendly team.
Looking for more information about bridging finance? Check out our other guides.