Bridging Loans: How They Work, Pros & Cons

Bridging loans are short-term, interest-only loans that are available to take out so that you can purchase a new property before selling your existing one. In certain circumstances they can be useful, however, it’s worth noting that they’re not cheap. Most commonly, bridging loans are used when you’re unable to sell your current home quickly enough to buy a new one. Additionally, bridging loans can be used if you’re purchasing a property at auction, or taking on an unliveable property to renovate that a regular mortgage lender wouldn’t look at.

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Types of Bridging Loans:

There are two types of bridging loans to consider. Firstly, there’s a ‘closed’ bridge. This is a bridging loan where there is a guaranteed exit, as long-term funding has already been put in place, but is still being waited on. However, these are a less common form of bridging loan since property sales and mortgages can fall through at the last minute.

Secondly, an open bridge is a more common option. This is used where there isn’t an exit date set for the lender, as long-term finance is not yet arranged. These loans tend to run for a specific period, typically six or nine months, but can be longer depending on the circumstances.

How Bridging Loans Work:

Certain high street lenders offer bridging loans and there are also several specialised bridging loan companies available. Typically, you can get bridging finance within a few days or even quicker in certain cases. Usually, you will be able to borrow up to 75% of the value of the property that the loan will be secured against, provided there is no other mortgage secured on it.

Lenders look at affordability. They do not lend on the basis of income multiples but instead consider how much you can afford to repay regardless of whether or not you are paying interest. However, bear in mind that if you’re planning to repay the interest your income and outgoings are likely to be scrutinised more harshly.

Advantages:

The first and most obvious advantage to a bridging loan is that you can use funds to buy you some breathing space if you’re selling your current property or raising finance in another way for a new property purchase. Additionally, it’s usually a quick way to get funds; in some cases, you can arrange for bridging finance with a lender within a matter of hours. Plus, if you opt to have the interest retained, there’s no requirement to pay the additional interest until you have repaid the amount borrowed. Finally, they tend to be flexible and can be repaid as soon as you’re in a position to do so.

Disadvantages:

Of course, it’s always worth being aware of the cons too. Bridging loans tend to have high-interest rates and there are usually additional fees to pay, so be aware that you are likely to repay significantly more than you borrow.

Before you borrow, make sure to work with your lender to come up with a feasible exit strategy.

Article by iConquer


Categories: Debt

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April 9, 2019 Bridging Loans: How They Work, Pros & Cons