What is a bridging loan?

Bridging loans are a type of short-term loan, which is secured against property, usually for a maximum term of 18 months. They can be arranged much faster than traditional mortgages and can be secured against almost any property type, including properties that would otherwise be unmortgageable. These are, in many ways, similar to auto title loans, which secure the vehicle as the collateral as these secure against the property in question.

Where a traditional mortgage may take 4-6 weeks to complete, bridging loans can often be arranged in as little as 7-14 days. This makes them an ideal option for those wanting to complete a property finance application quickly, such as an auction purchase, or to release equity urgently.

How Do Bridging Loans Work?

A bridging loan is secured against property in much the same way as a mortgage, through the registration of a legal charge.

The loan is agreed for a set term, usually between 1-18 months, and the loan must be repaid in full at the end of the term.

The monthly interest is often either added to or deducted from the loan upfront, meaning there are no monthly payments to make in most cases. This often allows you to take out a loan which would otherwise be difficult to afford, especially when the property will be sold before the end of the term.

One of the key factors that lenders will take into account when assessing a bridging finance application is the exit route. The exit route is the way that the loan will be repaid at the end of the term. The most common exit strategies are the sale of the property or refinance to a traditional mortgage.

Bridging Loan Uses

There are six common reasons for taking out a bridging loan, they are:

1. To purchase a property quickly, either to maintain your place in a chain or to complete a purchase at auction.
2. Purchasing a property (or even land) which would otherwise be unmortgageable. In most cases, bridging finance would usually be possible, assuming works were to be undertaken to allow the security to become mortgageable before the end of the bridging loan term.
3. To solve a short-term gap in cash flow. This situation is common with those who are looking to complete a property purchase before their own property has sold. As it wouldn’t usually be possible to secure a mortgage, a bridging loan is a great alternative to save your purchase.
4. To allow you to undertake the refurbishment of a property, including extensions, full internal refurbishment and even structural works. A mortgage lender would usually be uncomfortable with major works being undertaken during the mortgage term and it may even break the mortgage conditions.
5. When buying a property for less than it’s true market value, some bridging loan lenders will allow you to complete your purchase with little or no deposit. This is down to the fact that they will allow you to borrow against the open market value, rather than the purchase price.
6. When facing repossession and unable to secure a mortgage, a bridging loan may allow you to prevent repossession. This then gives you the chance to take back control of the sale process and secure the best possible price for your property.

Of course, as bridging loans are such specialist products, they can be used for almost any purpose, if it makes sense for both the borrower and lender.

Key points to consider before taking out a bridging loan

Is my planned exit strategy realistic?

It’s important that your exit strategy is realistic, and work needs to be done to ensure that it is. For example, sale of your property is completely realistic, but consideration needs to be given to the amount of time that it will take.

This can be checked by finding out the average time that properties similar to yours take to sell in your area. If your sale either falls through or a suitable offer isn’t received, you may end up having to sell for a less than ideal price or face falling into default on your bridging loan. This can be countered by choosing a slightly longer term on your loan.

If refinancing to a mortgage, it’s important that you have your exit agreed before completing your bridging loan. Where you have a mortgage approved, that is still not a guarantee that the lender will lend, and as such it’s important that you have given thought to a back-up plan.

Is a bridging loan the best product for my circumstances?

Bridging loans are a highly useful product and can allow you to get out of a difficult spot with minimal hassle due to the simplified underwriting. Although this can sound ideal, it can make people choose a bridging loan as the easy option.

Bridging finance is more expensive than a traditional mortgage and as such, they are not always the best option. To quickly find out if a bridging loan is the right option for you, speak to an experienced advisor who can offer different types of loan to give yourself the best chance of unbiased advice. If bridging loans aren’t for you, and you happen to be a medical professional, it may be worth your while to look at physician loans review from LeverageRx. This is a low down payment mortgage available to physicians, dentists, and other eligible medical professionals.

Bridging loans are very useful and can be invaluable in the right circumstances, but if cheaper borrowing can serve the same purpose, consideration must be given to it.

Am I getting the best possible deal overall?

It’s important that you do your research initially by seeking more than one quote. There can be a vast gulf in the terms offered by different lenders. When borrowing money, the cheapest deal is usually the best.

This isn’t always the case with bridging loans. Consider the speed that you need to complete and whether the lender will be able to achieve this. Remember, you need the cheapest loan for your circumstances, not necessarily the cheapest loan out there.

In addition, there are other charges to consider, including lender arrangement fees, broker fees and legal fees. These should also be compared to give an understanding of the total cost of the loan. The lowest interest rate is not always the cheapest deal.