A bridging loan is exactly what the name suggests: it’s a loan that ‘bridges the gap’ for a borrower when they have a short-term requirement and don’t currently have the funds available. Bridging loans have changed in recent years. Since the market crash of 2008, banks and building societies have grown reluctant to lend, and this is where the likes of bridging finance companies have moved into the property development and refurbishment market to bridge the funding gap left by high street banks. In this article, we’re going to take a look at what bridging loans actually are, how they work, their pros and cons and when you should consider using one.
Bridging Loans Explained
Bridging loans were originally used to acquire properties. A bridging loan can be used as a short-term loan taken out against the borrower’s current property to finance the purchase of a new property. Between the time that the old property is sold and the new property is purchased, a bridging loan bridges the gap between a debt becoming due and the main line of credit becoming available.
Bridging loans can enable people to purchase a property before they have sold their existing one. During this transition period, chances are the borrower will be in a lot of debt due to owning two properties, and a bridging loan can help to tide them over. In this way, a bridging loan becomes invaluable in facilitating a property purchase that otherwise would not have been possible.
As well as enabling the purchase of new properties, a bridging loan can also be used to finance restoration or conversion work, where mortgages are not available, pay off loans on an existing property or be used to free equity to boost cash flow in a business. Bridging loans are essentially quick access, short-term money at higher interest rates.
How Do Bridging Loans Work?
Bridging loans can allow you to acquire or refinance a property with only a cash or equity contribution equating to as low as 20% of the property value or purchase price. The typical advance is 70% of the value or purchase price of a property – and this includes roll-up on interest and fees over the agreed loan term. When used as a down payment on a new property, the proceeds can be used to pay off the bridge loan – including any interest and remaining balance – once the old property sells.
There are two main fees to pay with a bridging loan: an arrangement fee and an exit fee which equate to a percentage of the loan amount. Interest rates typically start from 0.9% per month, but can be as low as 0.5%; however, loans are generally priced according to the lender’s perceived risk.
Pros and Cons of Bridging Loans
Like any loan, a bridging loan comes with its own set of pros and cons:
- Funds are provided quickly after filling in a successful application.
- If you choose a loan with no monthly repayments, bridging loans can raise capital.
- Bridging loans are flexible and can be paid off as soon as you are able.
- You can incur high interest rates, particularly if you don’t have a good credit history.
- They can be more expensive than traditional mortgages.
- There’s no guarantee your existing property will sell in a timely manner; failure to repay a bridging loan can result in penalties.
Before selling a property, make sure you do thorough research to learn about asking prices and the typical time they are listed before being sold. If the market is strong, you may not need a bridge loan. However, if the property goes unsold for longer than the terms of your loan, you will need to have a contingency plan in place, such as negotiating the loan terms with your lender.
When Should You Use a Bridging Loan?
Bridging loans are typically aimed at landlords and property developers, those needing a quick purchase at auction, for example, where a mortgage is needed quickly. But a bridging loan can also be of use to asset-rich borrowers, such as business owners, who want straightforward lending on commercial properties.
Some borrowers have started viewing bridging loans as a simple alternative to mainstream lending. However, there is one crucial part of taking out a bridging loan that needs to be considered: your exit strategy.
Without a realistic exit strategy, lenders will not be willing to give you a bridging loan. An exit strategy is the plan you have in place to repay your bridging loan; it is crucial that you repay your loan in time, especially if you are rolling up interest.
When you reach the end of your agreed loan term, you are expected to repay in full. If you are unable to do this, there are a few options. You can extend the loan with your lender, although there is no guarantee they will agree to this or they may charge a higher interest rate for doing so.
Typical exit strategies considered by lenders are:
- Sale of a property
- Sale of other investments
- Refinance to a longer-term mortgage
- Sale of shares
A good lender will work with you to find the most suitable exit strategy and assess whether the plan is realistic and viable.
Ping Finance Bridging Loans
At Ping Finance, you can speak to our expert debt advisors and find the perfect funding partner for you. If a bridging loan sounds like something you would be interested in acquiring, we can put you in contact with lenders who offer these. If you have a good credit history, can demonstrate suitable experience and have a realistic exit strategy in mind, then there’s a good chance there’s a funder out there for you, and we can help.
Our finance services are straightforward, and we offer simple solutions to growing businesses. Our industry experience means we break away from the mould of traditional brokerages; we can confidently place your business with suitable lenders without affecting your credit score. And with our debt advisers keeping you updated and in the loop throughout the entire process, you will always know what’s going on, and they will always be available to answer any questions.