Bridging loans are short-term financial repayable loans that are usually secured against UK real estate property or land.
You can use bridging loans to finance your property payment as you wait to get a mortgage or sell your property. Bridging loans can also be in all other situations where money needs to be raised quickly either when buying or selling a property, or if you want to avoid repossession and clear mortgage balance.
The loans are offered for a period of between 1-18 months. Bridging loans could be open or closed.
Open bridging loans don’t come with a repayable deadline. You can repay them any time your mortgage finance is ready perhaps in a year or longer.
Closed bridging loans have fixed repaying date. You get to set a date when you know funds will be available to repay the loans, and you do everything you can to meet that deadline which can be a few weeks or months.
The application process is much more convenient, and the loan can be processed in less than two weeks.
Whether for the residential or commercial property, bridging loans can help:
- When you need to purchase a property in an auction
- When trying to avoid property repossession
- When buying uninhabitable property
- When purchasing a property below market value
Bridging loans are a no-brainer when you need to raise quick money, but they carry some level of risk, often higher than standard loan financing. For that reason, it is wise first to seek specialist advice before you choose to go with bridging loans.
Below are the upsides and downsides to taking a bridging loan.
Advantages of Bridging Loans
Fast processing – Applications can be completed in less than 14 days, making them ideal in an emergency situation.
No monthly repayments- unlike standard mortgages you didn’t need to make monthly repayments with bridging loans. All you need is the assets to repay the loan.
The bridging loans market is highly competitive in the UK, and for that reason, you can expect low-interest rates.
Interest rates start from as little as 0.49 % per month. Most property buyers would not have the instant cash ready to buy a property at an auction, and this allows you to buy a property and then get a longer-term mortgage, maybe if it not in a mortgageable at time of purchase.
In this case, a bridging loan can be convenient.
Property buyers can arrange for bringing loans either in principle before an auction or shortly after successfully bidding at the auction. Bridging loan experts in the UK advise that property buyers should get the property in question valued, and negotiate to finance before attending the auction. That way you will have a reasonable bidding amount. If you lose the bid, you will have nothing to lose other than the valuation fee. It is better than bidding blindly.
Another upside to bridging finance is the fact that it can be used to buy property that cannot qualify for a mortgage. That is in the case of devalued properties that have one defect or another and need expensive remodelling.
Usually, no mortgage company can agree to finance such property. Another application of bridge loans in the UK is for a property whose construction is not yet complete. As long as the valuation is accurate, you can get a bridging loan to finance such purchases and construction.
You can also use bridging loans to avoid repossessions.
If property owners fail to make payments on a mortgage or credit on the home, a bank or building society can get legal permission to repossess the property. Bridging loans can come in handy to repay mortgage arrears and prevent repossession. That is as long as the property has enough equity and you have a clear exit plan which is usually the sale of the property.
Then also, you can use bridging loans when you are hard strung on cash and need a short-term to maintain things as you find a way out. All you will have to do is present a substantial asset of equal worth such as a house
Are you in need of a short-term loan to cover a momentary lapse in funds?
If you can demonstrate significant asset-based personal value as collateral for the loan, such as your home, then a bridging finance may be the quick fix you require.
Disadvantages of Bridging Loans
The significant risk with bridging loans is that you might be unable to repay the debt at the end of the term. You need to sit back and map it all out to ensure your exit route is viable for you. Failure to repay a bridging loan at the end of the term often leads to repossession.
Bridging loans are generally more expensive than standard mortgages. Even though you can get pretty low-interest rates with bridging loans, mortgages remain to be the economically viable option for property financing.
In the case of avoiding repossession, where you will have to sell in the exit plan you have to ensure that the financiers give you enough time to find a buyer. That should be clearly outlined in the terms of the loan. Otherwise, you might end up selling your property for much less just to beat the repayment deadline.
For longer-term financing, you might want to consider conventional loans. You can also seek to compare interest rates between short-term standard investments (if you qualify for them) and bridging loans. That will help you make a wise financial decision.
Get the Best Possible Deal
Before signing on a bridging loan, you will compare different lenders.
Find a provider with the best terms and rates. Ensure the profits you get with a bridging loan are big enough to offset the costs.
When comparing bridging loans from different providers, it is best to consider the total cost of the borrowing.
A lot of many people focus solely on interest rates, but there could be extra fees such as exit fees and fund management fees.
Get a breakdown of the total cost before making the final decision. If used wisely bridging loans can be a powerful tool for property business, and a convenient option for home financing.