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What is a bridging loan?
The world of mortgages can throw up many confusing pieces of jargon – conveyancing, endowment, freehold – the list goes on. And many would also include the term ‘bridging loan’ on that list.
In this article, we try to get to the bottom of them – what they are, how they’re used and by who. We also examine some of the pros and cons of borrowing money in this way. Putting it very simply, a bridging loan does exactly what it says on the tin: it bridges the gap between one thing and another - and in this case those things are financial.
Bridging a gap
For example, you might consider taking out a bridging loan to cover a gap between buying the property you’ve set your heart on and selling the property you currently live in.
Say, for example, you’re looking to move and you find a new place you’d like to buy – great! But you’ve hit a snag – the sale of your old property hasn’t completed yet, so you don’t have the money from the sale to use to buy the new property. Yes, you know it’s coming but it’s just not in your account yet.
This is a perfect example of when a bridging loan could come in useful.
You’d be able to apply for the loan and, if successful, get the money in your account to buy the new property (when added to the mortgage you’ve taken out). You’d then repay the bridging loan when the sale of your current property goes through.
Bridging for business
Bridging loans aren’t just used by homeowners to help them move house – they’re also used by property developers.
For example, if a developer wants to buy a property to renovate with the sole intent of selling it on afterwards, they could take out a bridging loan. This allows the developer to borrow the money to buy the property in the short-term, do it up and then put it back on the market.
As before, they’d then repay the loan when the sale of the property goes through.
The good with the bad
One of the best things about bridging loans is the flexibility they offer in giving you quick access to the money you need. That’s what they’re designed for.
Using one means – whether you’re buying a property to live in yourself, or developing it for someone else to buy – there’s less risk you’ll miss out on a good deal.
However, you should be aware that because bridging loans are intended for short-term borrowing, the interest rate can be very high and quite often they also come with large admin fees to set up. Another thing to consider is that the longer it takes for the money to come through from the property sale, the longer you’ll have the loan – which could mean the interest keeps mounting up.
So, if the buyer of your current property (or the one you’ve renovated if you’re a developer) is dragging their heels, it could cost you. And as mentioned before, with a loan on a high interest rate, a slow sale is something you could do without.
If you’re unsure, just ask!
We hope this introduction has helped you understand what a bridging loan is and why it’s used. As with anything to do with loans and mortgages, if you’re thinking about borrowing, you should take the time to carefully weigh up what’s available and what will best suit your needs.
And if you’re unsure – just ask! One of Ocean’s advisors will be able to talk through your circumstances and help answer any questions you have on what’s best for you.
If you'd like more general info on types of loans and their use, you can find our loans page here.