If you’re asset rich and cash poor, then you may have heard of bridging loans as an option when you need to borrow. But what exactly are bridging loans, how do they work, and when should you use them? Read on to find out.
Very basically, a bridging loan is a short term financing option used to ‘bridge’ a gap between money due to you and existing assets. Bridging loans don’t typically last longer than one year, and are most often used as a stop gap to help secure a new property. Providing finance in between the sale of one property and the purchase of another, the bridging loan is designed to help you quickly secure large amounts of money when most needed.
There are two types of bridging loan, ‘Closed,’ meaning that there is a definitive exit route in how and when the debt is to be repaid, and ‘open’ meaning that the exit date of the loan is left open until you receive the funds to repay.
Who uses them?
Bridging loans are a popular option for property developers, landlords and buy-to-let borrowers, but can also be useful for those simply moving home and awaiting completion on their property. They can also be used for redevelopment projects, property or land purchase at auction. As long as you have a clear way or repaying the money borrowed, a bridging loan is a viable option for more or less anyone who holds assets.
Advantages of Bridging Loans
Bridging loans can be arranged far more quickly than traditional mortgage products, so if you need to secure funding quickly this is an obvious advantage. There is also no upper age limit on borrowing, as with mortgages, and you’re always able to repay early without being penalised.
Disadvantages of Bridging Loans
The convenience of a bridging loan doesn’t come too cheaply, and there can be hefty fees involved as well as much higher interest rates. Most bridging loans come at a cost of 0.65% per month to 2% per month, depending on personal circumstances.
There are obvious risks to bridging finance if you have no clear exit strategy in place and no clear way of repaying the loan. It’s also worth bearing in mind that even with an exit strategy, the best laid plans can go wrong. If for example, the sale of a property you own falls through, you can find yourself with no means of repaying the loan. For this reason, it can be a good idea to have emergency back-up in place – for example, access to other funds or assets in order to repay the loan.
Choosing a Bridging Loan
Before committing to a bridging loan, make sure you have sought the best deal. If preferred, you can also use commercial mortgage brokers to help you find the right solution. A broker is far more likely to find you a better deal to help you save money on fees and interest rates.
Wendy Lin is a freelance writer and mother of 3. She travels the world with her private business consultancy company and enjoys educating young entrepreneurs.