Bridging finance or bridging loans are a short-term funding solution. They are used to ‘bridge’ a gap between a debt coming due – primarily property transactions, such as a last minute property purchase at auction. 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’ loans such as a standard property mortgage with a high street lender.
How do bridging loans 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, which is where an independent finance broker such as Heritage Financial Solutions Ltd can really help to find you the best deal, furthermore many lenders will only deal with intermediaries and not clients direct.
However, interest rates on bridging finance can be high and there can be hefty administration fees on top. If you take out a bridging loan, you could face costs of up to 1.5% a month – meaning 18% a year.
Who are bridging loans aimed at?
Generally speaking, as mentioned earlier bridging loans are aimed at those in need of short term finance, such as 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 finance?
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, this could stall a purchase or even cause a property deal to fall through.
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. The problem is, you may not have any guarantee of being accepted for a mortgage with a mainstream lender after having taken out a bridging loan. This could put you at risk of losing your home. Put simply, bridging loans should not be viewed as an alternative to mainstream lending.
Your home may be repossessed if you do not keep up repayments on your bridging finance, or face other serious financial consequences such as defaults or CCJs.