While a bridging loan can be helpful when you need a quick lump sum to make a payment, there’s a lot to know before you take one out.
What is a bridging loan?
A bridging loan is a short-term loan to help 'bridge the gap' between something.
For example, people often take out a bridging loan to tide themselves over in between selling their house and buying a new one. The loan would allow them to put money down to secure their purchase while they wait for the sale of their property to complete.
To get a bridge loan, you’d usually need to have a high-value asset such as property or land. This is because the loan will be secured to that asset.
How does a bridging loan work?
Imagine you want to buy a new home worth £300,000, and you need to put down a deposit of £60,000 to secure it. Then imagine you only have £20,000 to put towards your deposit whilst you wait for the sale of your old home to go through.
In these circumstances, you could apply for a bridge loan worth £40,000 to top up your deposit which would tide you over until the sale of your old property goes through. Once the sale of your old property has completed, you should then be able to pay back the loan.
There are two different types of bridging loan:
Closed bridging loans
A closed bridging loan has a fixed end date, which means you agree on a date with the lender to repay the entire loan.
The length of a closed bridging loan can last as little as a few weeks or months.
Open bridging loans
With an open bridging loan, you won’t have an agreed date with your lender, so it’s usually a more flexible option. However, this also means they can have a higher interest rate than closed bridging loans.
The length of this type of loan can be up to a year or sometimes even longer. Bridging loans are only intended for short term use and are a specialist finance.
What can I use a bridging loan for?
You can use a bridging loan for various reasons, such as:
- purchasing a property
- as an alternative to high street lenders because of the quick turnaround time, but are usually more expensive than other types of loans
- property development
- buy-to-let investment
- business ventures (a property developer might use a bridge loan to buy a property and renovate it in a short amount of time before they sell it (usually at a profit) and pay back their loan)
- buying a house at auction (property developers often use bridging loans to pay the deposit on properties they buy at auction because they usually need to secure the property at short notice).
How much does a bridging loan cost?
The interest rates for bridging loans tend to be high, and the amount you can borrow varies from lender to lender.
Some lenders offer loans with rates as low as 0.4%, whilst others offer a 2% interest rate. If you have a good credit score, you’re more likely to get a deal with a lower interest rate.
Since bridge loans are usually short-term fixes, the interest can be charged monthly rather than yearly (APR). However, any small changes in the interest rate can have a big impact on the cost of your loan.
Bear in mind that you may have to pay a set-up fee as well. These would usually cost between 1% and 2% of your overall loan.
The amount you can borrow depends on multiple factors, such as:
- your credit history
- what size loan you’d like in comparison to the value of the property
- your income
- the duration of the repayment period
- the type of security you’re offering the lender.
How to get a bridging loan
To get a bridging loan, decide on the amount you’d like to borrow and consider how much time you’ll need to pay it back.
When applying for a bridging loan, you'll need to provide some information to support your application. For example, you'll need to let the lender know if you have a mortgage, how much your property is worth and how much equity’s in your home. Make sure you have all this information to hand when you're ready to apply.
Decide which loan you’d like to apply for. You can use a comparison website to help you decide. You can apply online or over the phone.
Once you’ve applied, you’ll usually find out within 24 hours if your application is approved. Your loan will then be recorded as a charge on your property, similar to a mortgage or secured loan.
Top tips on managing a loan
- shop around for the best interest rates first – use a price comparison site and soft search eligibility checkers before you apply
- never borrow more than you’re able to pay back
- always make repayments on time, every month.
Please note that bridging loans can be complex, so you should seek independent financial advice if you wish to take one out.
Read on to find out where the best place is to put your money.
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