Bridging loans are a short-term finance solution intended to ‘bridge’ the gap in your finances. They can be used for a number of reasons, but they hold the most weight as a funding solution when it comes to property. One of the most fundamental benefits of bridging finance is the speed in which the Bridging Loan can be in your account, which can be a matter of days rather than the months it can take for traditional mortgages to be completed. This can be extremely useful in a number of situations, including when buying at auction or trying to get a really great deal on a property, where a quick sale might sweeten the deal for the seller. You may also consider turning to bridging finance when selling your own home and embarking on the purchase of a new one. The strain and hold ups around waiting for funds from the sale of your property to come in before making payments for fees, stamp duty and so forth on the new property. Common reasons for using bridging loans on property purchases is because the property will be immediately sold on (flipped) so a long-term mortgage arrangement is not suitable, or the property is in disrepair so a traditional mortgage would not cover the initial costs. In the second scenario you may find that a bridging loan will cover you for the first year so that the property is then in a fit state to mortgage later down the line.
So, how do they work?
They are a short-term finance solution, so you wouldn’t usually find them having longer than a 12 month term.
A Barclays bridging loan or bridging loan from a mainstream lender will usually provide you with a loan on an LTV of 70% but depending on the circumstances there are options for 100% LTV bridging finance. Working on a 70% LTV, this roughly means that you will be able to borrow 70% of the value of the property. Depending on the lender the value of the property could be; the amount you purchased it for, the current market value in its current state or in some cases the estimated market value once the project has been completed.
They do tend to have higher interest rates than traditional mortgages. You can usually find a traditional mortgage with under 4 percent interest whereas a bridging loan will average between 8 and 15 percent. It is important to consider the interest rates when deciding if bridging finance is right for you and there are brokers and tools out there to help you, you could start with the NatWest bridging loan rates calculator to give you an idea.
There are different ways to pay the interest so make sure you look for a provider who offers you the payment options that work best for you. Usually, you will pay interest each month and then pay the loan amount off at the end of the loan term. However, some providers offer you the opportunity to pay the interest of at the end of the project as a lump sum and some lenders withhold the cost of the interest. If you agree a loan where the interest is withheld, you will receive the funds minus the interest at the beginning of the agreement, so it could leave you slightly low on finance in the short term dependent upon your circumstances.
As with most lending options you will find the interest is not the only cost implication. With bridging loans, you might find there are also application, survey, valuation fees and more so be sure to check this out when deciding on a lender.
In short, bridging finance can, in the wrong hands, be a costly funding solution. It does however have a number of benefits that can far out way the cost. It is likely to actually save you money overall if it means you can act quickly on a property purchase to secure a really good deal. Therefore, in the right hands and with the right research bridging finance can be an exceptionally tool to have in your belt.