Written in collaboration with Rosana Beechum

Bridging loans are essentially as they sound; it is a loan that helps to bridge the gap when you need to pay for something new while waiting for funds to become available from selling something else. This form of loan is commonly used in real estate when you want to purchase a house but you are waiting for yours to sell. They can be invaluable, especially if you are on a deadline. Keep reading for more information.

What are bridging loans used for?

As mentioned above, bridging loans are most commonly used for house purchases, but they do have other uses. You can also use a bridge loan for property development, divorce settlements, business ventures, property development, and paying tax bills. In addition, bridging loans are incredibly popular with landlords and property developers who sell the properties soon after acquiring or building them.

Advantages & disadvantages

A bridge loan has several pros and cons. On the plus side, you can get the money that you need fairly quickly. In addition, you can borrow a large amount – if you have the right collateral. Finally, they are also incredibly flexible, more so than some of the loan options. However, the fact that you need collateral can also count as a negative too. Depending on the lender, the interest rates may also be quite high, as can the fees attached.

The different types of bridging loans

When it comes to bridging loans, there are two forms, open and closed. An open bridging loan has no end date set; it can be repaid whenever the funds you were waiting on become available. That being said, this is usually a year or maybe longer – it depends on the provider. A closed bridging loan, on the other hand, has an end date. The date itself takes into account when the person should be able to access the money needed to pay the loan back. These are often more short-term, lasting less than a few months.

The cost of bridging loans

There are several costs associated with taking out a bridging loan; however, they do not differ much from the costs associated with other forms of loans. First, there is likely to be interest added to the loan. This will depend entirely on the lender, your credit score, and how much you have borrowed. Luckily, for some lenders like Advias, you can use their bridging loan calculator in the UK to determine your repayments. 

Bridging loans, again like other forms of loans, also come with their own fees, but again this depends on the lender. You might have to pay an arrangement or facilitation fee, exit fees, admin, legal fees, valuation and brokerage fees. Always read the fine print when it comes to applying for these loans so that you have a good idea of what you are on the hook for.

The application process

How to save and be more money savvy

The application process is pretty straightforward. First, you need to work out what you want to borrow and how long you want it for. Then you need to start gathering your supporting documents; these again can vary depending on your lender. Usually, you will need a valuation of your home and your mortgage details.

You next need to decide whether you want to work with a broker, which is the easiest option, or whether you want to find bridging loans yourself. Choose where you want to apply and go through their application. Submit any pieces of supporting evidence that you need. Wait to see whether you are approved and if you are, you then need to accept the loan.

How long does it take to secure a bridge loan?

This, again, can vary between lenders. The application process is usually pretty quick. Most of the time, you can expect to find out whether your application has been successful within a couple of days. After that, it can take up to two weeks for the money to clear into your bank account.

Borrowing limits

This again depends entirely on the lender that you are using. Most lenders will consider offering a bridge loan from thousands to millions of pounds. They require collateral – usually property. The amount that you can borrow depends on your credit score and the value of the collateral that you have to offer.

Alternatives to consider

Bridge loans aren’t the only form of loan that you should think about if you want to borrow money quickly or for a shorter period. For example, you could consider taking out a second mortgage or remortgaging your home. There are also secured loans or personal loans that might work for you. Finally, if the bridge loan is for a property, then you could also consider a let-to-buy mortgage, although they can be difficult to find.

In conclusion

A bridge loan can be an invaluable financial tool. Commonly used for real estate and the purchase of property, they can allow you to complete on a sale so that you don’t lose your dream home before you have had the chance to sell yours. They are more flexible, and the application process is pretty simple; however, you do need to have collateral, and the interest fees can be a little costly.

You may also like...