Bridging loans are a short-term funding option. They are used to ‘bridge’ a gap between a debt coming due – and we’re talking primarily about property transactions, here – and the main line of credit becoming available. Or they can simply act as a short-term loan in pressing circumstances.
They can be invaluable in facilitating a property purchase that otherwise would not be possible. But as you might expect with a stop-gap measure, they can be significantly more expensive than a ‘normal’ loan.
What are bridging loans and how do they work?
Bridging loans are designed to help people complete the purchase of a property before selling their existing home by offering them short-term access to money at a high-rate of interest.
As well as helping home-movers when there is a gap between the sale and completion dates in a chain, this type of loan can also help someone planning to sell-on quickly after renovating a home, or help someone buying at auction.
As banks and building societies have grown more reluctant to lend in the wake of the financial crisis, there has been an influx of bridging lenders into the market.
Who are bridging loans aimed at?
Generally speaking, bridging loans are aimed at landlords and amateur property developers, including those purchasing at auction where a mortgage is needed quickly.
They may also be offered to wealthy or asset-rich borrowers who want straightforward lending on residential properties.
When should you use bridging loans?
Bridging loans can be used for a variety of reasons, including property investment, buy-to-let and development.
However, more recently, there has been a growing trend among borrowers to use bridging loans because high street and private banks are taking longer to process applications for larger home loans.
Some borrowers are also viewing bridging loans as a simple alternative to mainstream lending.
While a bridging loan may sound tempting, if you’re thinking about taking one out, you need to think carefully about your exit strategy. This might, for example, involve getting a mainstream mortgage or a buy-to-let mortgage, or selling the property altogether.
Crucially, if you’ve not used this type of finance before you need to tread carefully and get all the facts before hand and figure out if it’s the right sort of lending for you.
Put simply, bridging loans should not be viewed as an alternative to mainstream lending.
Where can you get a bridging loan?
Bridging lenders can come in all shapes and sizes, ranging from one-man bands up to professional outfits regulated by City watchdog, the Financial Services Authority (FSA).
