The question ‘what is a bridging loan‘, may seem like financial jargon, but it provides actionable insights for homeowners and businesses across the country. When used properly, bridging loans offer powerful and profitable financial advantages. However, like all financial decisions, bridging loans require understanding and careful consideration.
Understanding Bridging Loans
Bridging loans unleash flows of capital for time-sensitive investments. Unlike other loans, which arrive based on income, borrowers secure bridging loans on a valuable asset, such as land or a house. As their name suggests, these loans help borrowers bridge a gap in financial transitions, providing short-term loans to those expecting financial liquidity in the near future.
What is a Bridging Loan For?
Homeowners wishing to buy a new property often use bridging loans while selling their old property. Whether hunting for a buyer or finalising a sale, bridging loans can help build the path to their dream home.
This often applies to prospective buyers who find a property on auction or for sale with a pressing deadline. Bridging loans can stop a desirable or profitable property from slipping through your fingers.
This rapid flow of liquid assets can also help property owners who aren’t currently in the market. If homeowners need finances for a divorce or unexpected tax bill, bridging loans can come in handy.
Who are Bridging Loans For?
As mentioned, residential and personal homeowners use bridging loans to smooth the transition between properties. However, they can also come in handy for commercial endeavours.
Developers and renovators use bridging loans when investing in property, to make land or buildings more profitable in the future. For developers, bridging loans provide resources to construct buildings on empty or run-down land. Renovators also use bridging loans to upgrade houses, flip derelict properties into appreciable assets, or turn buildings into residential apartments for tenants.
Sometimes residential buyers require bridging loans to buy a property that fails to meet a traditional mortgage lender’s requirements. If a house doesn’t have a functional bathroom or kitchen, bridging loans provide the resources to renovate a home, increasing the chances of a traditional mortgage later down the road.
So, whether you’re upgrading to a family home, developing a plot of land, or preparing a building for a buy-to-let mortgage, bridging loans can help bridge the gap with liquidity. What is a bridging loan if not versatile?
The Different Types of Bridging Loans
Open and Closed Bridging Loans
Lenders offer two main categories of bridging loans: open and closed.
The names refer to the time allocated for the loan, a specific closed date, or a broader open term. Of course, open terms can only be so open, and they rarely extend beyond a year. Closed bridging loans tend towards the shorter end of short term and normally deal in weeks or months.
Closed terms suit homeowners in the final stages of selling best. If a seller gives their buyer a purchasing deadline, they can coincide it with the closed bridging loan terms.
On the other hand, homeowners with valuable homes on the market, but without a buyer identified, are better suited to an open bridging loan.
Fixed and Variable Bridging Loans
Like mortgages, lenders offer bridging loans at fixed or variable interest rates. Borrowers agree to fixed rates with their mortgage broker and lender before taking the loan. Variable rates, by contrast, depend on the lender’s interest rates over time. This could prove more or less expensive than a fixed rate, depending on economic growth during the term time.
First or Second Charge Bridging Loans
The first or second charge refers to other existing loans on the asset. If a borrower already has a mortgage on the property, paying that mortgage becomes the first priority, and bridging loans are a second charge.
For borrowers who own their assets outright, first charge bridging loans offer better rates and more financial stability.
What is a Bridging Loan’s Costs and Benefits?
Due to their size and speed, bridging loans incur more fees than other types of loans. Many lenders charge administrative fees, valuation fees, and exit fees at a small percentage of the loan. On top of that, they may also charge legal fees and higher interest than mortgages. Bridging loans often risk valuable assets, so borrowers must choose carefully to access a bridging loan’s benefits.
First and foremost, bridging loans offer large, rapid financing. Bridging loan approval often arrives fewer than 48 hours after application, with funding following in a week or two. Depending on the asset value, and the loan required, bridging loans provide anywhere from £5,000 to several million. Compared to other financing options, bridging loans also offer unique flexibility in terms and forms, making them a customisable, versatile, and powerful financial tool.
How to Choose the Right Bridging Loan
Robust exit strategies allow borrowers to make the most out of their bridging loans. With the help of an experienced mortgage broker, many private and commercial borrowers sustain flourishing financial health through the power of a bridging loan.