It still causes some confusion among a lot of the people and businesses we speak to: bridging loans. This short guide explains the basics of what may be a very suitable finance product for your situation.
Bridging loans are a type of short term loan. It’s best thought of as a temporary loan which gets you from A to B, until you can either clear the loan in full or secure a more permanent form of finance. That’s where the “bridge” idea comes in – finance to get you from step to another.
How do they compare to regular term loans?
In theory, they differ because they are for a specific short term purpose, whereas term loans often have more general commercial purposes. In reality, the speed of getting the cash in your account is the main difference. It can take months for other lenders to complete a term loan, but a bridging loan can be ready in 24-48 hours.
What can I use bridging loans for?
Lenders that offer bridging loans usually do so for the purchase and renovations of properties. It is a very common product used in property finance. They can be both commercial & residential, and the works can be ground-up developments or just adding a bathroom to a flat.
You can also use bridging type loans for other short term commercial means, as long as you have a clear exit in place and it depends on what appetite the lender has for your plans.
What’s an exit, in regards to bridging loans?
Exits are what lenders say when they mean how you are going to either clear the bridging loan in full (with the interest costs) or move it onto a more permanent type of finance, like a term mortgage.
You might hear us speak of closed bridging loans and open bridging loans. Closed loans are a line of credit with a fixed exit date in place. For example, the sale of the property to pay back the loan is already in place at the time of taking the loan. Open loans are given without the exit yet fixed, so you are given “up to” a certain period. We can discuss your options here and which lenders best fit your need.
What can I expect with the interest rates?
Given the specialist nature of the loan – i.e. it’s for a specific short term purpose – the interest rates are higher than traditional term loans.
You can sometimes choose to have the interest payments “rolled up”, which means you don’t have to pay monthly but instead pay a lump sum at the end of the agreed term. This makes it useful for those without the required funding at the early stages of receiving the loan.
How to use bridging loans in financing developments?
Bridging loans form the crux of what property developers use to fund their projects. Let’s say a developer owns a site and has planning permission from the council to build a small apartment block. A good solution here, to spread the costs for the company, may be to get a bridging loan for 3-6 months, which gives them the funds to fully complete the work. This loan is fully paid off after the period either by the sale of the apartment block or individual apartments, or often by moving the bridging loan onto a longer term finance product.
Bridging loans can sometimes be used in other commercial areas where a short term temporary loan may be required. This is providing there is a clear “exit” from the loan.
Are there any additional costs with bridging loans?
This depends on the circumstances on the loan; in general, there will be a fee for arrangement of the loan and there are administration fees as with all products. This varies from lender to lender, and our team are on hand to explain any complex terms & conditions of the loans so you know what to expect.
What about bridging loans for property refurbishment?
It’s a good product for renovations and refurbishments because you get funds really quickly to allow you start the works immediately.
In fact, bridging loans are often used to convert properties into a state where a lender can provide a good mortgage. Not all properties are eligible for certain types mortgages e.g. there’s no bathroom in a residential property, so you can use bridging finance to add the bathroom and then exit the loan by switching it onto a full term mortgage.
And auctions…
Yes, lots of buyers at auctions use bridging loans to assist with the purchase, rather than go to a traditional provider where the process is much lengthier – after all you often only have up to 28 days to bring the funds to the table at auctions, making the loan ideal. Read here for more about auction finance and what to expect.
There you have it – the basics of bridging loans. Is is the right option for you?
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