23 May 2022
A bridge loan is designed - as the name suggests - to bridge a gap in funding and is often used to facilitate the purchase of a property. This article runs through some of the primary uses and when it might be appropriate to get a bridge loan for a property.
Unlike mortgages, which typically have long terms ranging from 20 to 35 years, bridge loans are designed for the short-term.
The maximum term for bridging finance is usually 12 months. However, depending on your circumstances, you might be able to get one for 24 months. Similarly, mortgages can take months to arrange, whereas bridge loans can be approved much quicker.
Despite the swift and sometimes flexible process, interest rates tend to be high on bridging loans. Also, it's important to remember that the finance is secured against your property, meaning that if you don't repay the loan, you could risk losing it to the lender.
You might opt for bridging finance when you want to purchase a property before selling your existing one. Landlords sometimes use it when they want to buy an investment property quickly. For instance, finance can enable them to buy a property attracting a lot of attention from other buyers due to its potential for good returns.
You could also use a bridge loan to buy a property at auction - buyers usually must pay for auction properties within 28 days. Bridging finance isn't always used to buy property, though business owners sometimes use it to boost cash flow when waiting for longer-term funding.
The cost of your bridging loan will depend on various things, including the interest rate and arrangement fees. You can opt for a fixed-rate bridge loan or a variable speed one, and you'll know exactly how much interest you'll pay with a fixed-rate loan. However, interest rates might be higher, and the interest on variable rate loans can fluctuate monthly.
Like other forms of finance, the interest rate offered to you will also depend on your earnings, the amount borrowed and the repayment term. Aside from interest and loan repayments, you'll have to factor in the following to work out the overall cost:
Valuation fees - your property will usually have to be valued because it'll provide security for the loan.
Arrangement fees - arrangement fees typically amount to around 2% of the loan value.
Exit fees - Often, borrowers will have to pay a fee at the end of the loan term to cover the admin costs of removing their "charge" on your property.
If you take out bridging finance, you might decide to roll up your interest and pay it at the loan's term. This way, you can avoid monthly interest payments and spend it all at the end along with the principal amount.
Suppose you know when your longer-term funding solution will be available. When your mortgage funds are released or the sale will complete, you can contractually agree to a date with the lender for the bridge loan repayment.
This is known as a secured loan. Secured loans tend to have lower interest rates because there's more repayment certainty from the lender's perspective. On the other hand, available loans don't have a fixed repayment date; however, they tend to have higher interest rates because the lender doesn't have the same level of certainty.
Bridging loans aren't the only type of property finance out there. Check out our blog post on the five main types of property finance to determine which might be most suitable for your plans. You can always use Funding Options to determine how much bridging or property finance your business could be eligible for, and it won't affect your credit score.Find a bridge loan
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