An Explanation Of Bridging Loans

A bridging loan is what you can use to finance the gap in time that might happen when you have to pay for something you want to purchase but are waiting on funds to be made available from selling something else in a different transaction.

People frequently use bridging loans in real estate if they're trying to buy a piece of property yet are also waiting for the final sale transaction of a different property to finalise.

A bridging loan is a secured loan. That specifically means you need an asset that is high in value in order to get one. Land and property are common assets to use in cases such as these.

What can a bridge loan do for you? Bridge loans are utilised for many different scenarios. They include but are not limited to the following:

Development of property

Buying properties

Business ventures

Buy-to-let investment opportunities

Divorce settlements

Paying tax bills

Property developers at auctions also use bridging loans quite frequently. That's because they might need to put down a deposit on short notice to secure a purchase.

A bridging loan specifically for property development

Bridging finance is very popular among property developers and landlords that need to fund specific projects on properties they intend to sell of fast once done.

Residential bridging loans

Bridging loans are also popular among those moving house.

Kinds of bridging loans

There are two primary kinds of bridging loans.

1) Open bridge loan

These don't have a set end date associated with them. In short, you can repay them at any time the funds finally become available to you. These loans often last for a full year, but some of them will go even longer.

2) Closed bridge loan

These do come with fixed end dates. The fixed end date is typically based on your anticipated timeframe of available funds you intend to pay back with. These bridging loans are typically short-term in nature, ranging from several weeks to a few months.

Open bridging loans tend to be more expensive given their relative flexibility to closed bridging loans. Whatever kind you pick, you'll need some sort of 'exit route', which would be a means of repaying the bridge loan.

Picking the right bridge loan

Prior to doing a comparison of bridging loans, you need to consider a few things. These factors include the following:

The amount you hope to borrow. Lenders who provide bridging financing do so in amounts from £5,000 to more than £10 million.

The value of your property: This impacts the amount you can borrow as well as the bridging loan rates offered to you.

The length of time you need to actually borrow for: Bridge financing might last a month or up to two years.

The existence of a mortgage on the property: This can impact the amount you can borrow via a bridge loan. It will also potentially determine whether you're looking at first- or second-charge loans.

First- or second-charge loan? In terms of applying for bridge financing, a lender will add a 'charge' to any property you put up as security. Such charges set the debt priorities if you wind up unable to repay the loan. If your property gets seized and then sold off in order to pay outstanding loans, then a first-charge loan gets paid back first before any second-charge loans.

First-charge loans happen with the bridge loan is the only borrowing that your property is securing. A mortgage is usually a first-charge loan. However, if there is no mortgage, or any other kind of outstanding borrowing against your property, then other sorts of loans, including bridge loans, can serve as first-charge loans.

Second-charge loans happen when a property already has a mortgage or some other kind of loan against it. Second-charge lenders typically need to get first-charge lender permission before they're able to be added to the mix.

Properties don't have limits on the number of charges that can be listed against them.