Bridging loans are a way to borrow money in the short term. They can be used to ‘bridge the gap’ if you are buying one property before selling another. Unlike mortgages, bridging loans can be arranged quickly if speed is important.
A bridging loan is usually short-term borrowing used as a way to bridge a gap in funding until your house sale – or other transaction – goes through. As an example, a bridging loan can be arranged if you buy a property at auction and you need the cash immediately.
This is how bridging loans work – credit of information to MoneySuperMarket:
- Your new home is priced at £350,000
- You need £100,000 to put down as a deposit. The rest will be borrowed through a mortgage
- You have £25,000 in savings so you’ll need £75,000 more for the deposit
- You are waiting for your current home to sell, valued at £250,000
- You choose to take out a bridging loan for £75,000 to ‘bridge the gap’ for the deposit
- You repay the loan (and interest) when you sell your current house
Bridging loans can be used for various reasons when you do not have the funds available immediately:
- To secure a house at auction when a mortgage will take too long to come through
- To cover renovation costs until it is possible to remortgage to release equity for the project
- To cover the cost of buying the land and the building work, while you apply for a mortgage when building your own home
Before considering if a bridging loan is right for you, you need to consider your personal, financial situation and from where you are going to borrow.
A bridging loan may suit you only if you are looking to borrow a large sum of money that you will be able to pay back quickly.
There is an eligibility criteria that you have to meet to apply for a bridging loan:
- You must be aged 18 or over
- You should have a valuable asset to use as collateral (usually your home)
- You should live in the UK
Bridging loans are secured on your property. Before borrowing, you should be confident that you will have funds available to make repayments. If you struggle to keep up with your repayments your home could be at risk.
Like any other money borrowing process, bridging loans have their pros and cons:
+ One of the disadvantages is that the process of getting a bridging loan is very quick and could be paid out in a matter of days (subject to the lender’s criteria).
– A disadvantage is that they usually come with higher interest rates than other types of loan. Interest is typically calculated monthly rather than annually.
+ As bridging loans are secured against your property (or other valuable asset) you should be able to borrow larger amounts than other types of loan.
– There can often be several additional fees to pay, such as exit fees, arrangement fees and legal fees. Before applying make sure you know exactly what you will need to pay.
+ Bridging loans are pretty flexible. They can be fixed or variable interest, open-ended or closed loan term. Some lenders charge no exit fees if you want to repay early.
– As a bridging loan is secured against your property, your home will be at risk if you cannot keep up with repayments.
When taking out a bridging loan, there are some terms you should know, such as:
First charge and second charge. A charge is a legal agreement that lists the order in which lenders will be repaid if you are unable to repay your loans. A second charge is a term used for a bridge loan when you have an existing mortgage.
Fixed or variable interest. Like any loan, a bridging loan has interest rates applied. They can be either fixed or variable. With a fixed rate you will know exactly how much you will be charged and monthly repayments will be the same. Fixed rates are likely to be slightly more expensive. With a variable rate the interest rate can change.
Bridging loans can be Closed and Open. With a closed bridging loan, there is a fixed repayment date. With an open bridging loan you will have no fixed repayment date, although you will be expected to pay off the loan within one year.