The Essential Pros, Cons & Costs of Bridging Loans
Recent years have seen the UK bridging loans market grow, expand and diversify like never before. But what exactly is bridging finance? Or more importantly, what are the benefits of bridging loans, over and above more traditional financial products?
Bridging loans are short-term interest-only loans, which are typically used to cover the costs of property investments. Bridging finance allows borrowers to purchase properties while awaiting the sale of their existing property – effectively ‘bridging’ this temporary financial gap.
Uses of Bridging Loans
Most borrowers use bridging loans to buy properties in cases where their current property has not yet been sold. They are also routinely used to cover the costs of large-scale property refurbishments, upgrades and extensions, prior to the property being sold-on for profit. Investors looking to buy properties quickly at auctions also often rely on bridging finance.
Types of Bridging Loans
There are two primary types of bridging loans, which are as follows:
- Closed Bridge. A ‘closed’ bridge refers to a loan provided to a borrower who already has a guaranteed repayment plan or ‘exit strategy’ in place. They are able to specify and guarantee an exact repayment date.
- Open Bridge. An ‘open’ bridge refers to any bridging loan provided where no specific exit date or plan is provided. Open loans typically run for a fixed period of six months to one year.
How Bridging Loans Work
Across the UK, more High Street lenders and independent companies are offering access to bridging loans than ever before, with successful applicants often accessing the funds they require within no more than a few days.
- Bridging loans are typically secured on existing properties owned or other assets. Proof of income and strong credit ratings may therefore not be required.
- It’s usually possible to borrow up to a maximum of 75% of the value of the property you wish to purchase. Limitations vary between lenders and are often negotiable.
- Bridging brokers compare the services offered by dozens of providers across the UK to find the best deals.
- The total amount owed including interest and all borrowing costs are usually repaid in one lump sum within no more than a few months to one year.
The Pros of Bridging Loans
Quality bridging loans bring a variety of unique benefits to the table, including but not limited to the following:
- Speed. While most bridging loans are paid out in a matter of days, some lenders are able to transfer funds within hours of the application’s submission.
- Deferred Payment. It may not be necessary to repay a single penny of the loan until the agreed repayment date at the end of the term.
- Flexibility. Bridging loans are generally more flexible and accessible than conventional loans and mortgages.
The Cons of Bridging Loans
However, there are also some downsides to factor into the equation, such as:
- High Interest. The comparatively high interest rates attached to bridging loans make for steeper borrowing costs on longer terms.
- Collateral. It may be impossible to qualify for a bridging loan in the first place, without sufficient collateral to guarantee the loan.
- Fees. Many lenders charge a variety of administration, processing and completion fees which quickly add up.
First-charge bridging loans are regulated by the Financial Conduct Authority or FCA, meaning that the lender must follow a number of important operational rules. However, the same rules may not apply in the case of second-charge loans – consult the Financial Ombudsman Service directly if you encounter any issues.