Bridging loans are a form of non-bank loan which are often used to complete on properties under a short timeframe. The loan can essentially help to ‘bridge the gap’ when one wants to buy a house, before they have sold their current home. Or typically used by property developers and investors to avoid traditional property chains and lengthy mortgage applications.
The role of bridging loans emerged following the financial crisis in 2008 where banks became more strict with their lending criteria. It has thus become more popular when there are economic downturns or increases in interest rates, where people are looking for alternative forms of finance.
There are two types of bridging loans that you need to know; ‘closed’ and ‘open’. With a closed bridging loan, there is a fixed repayment date. This kind of loan typically applies to instances where one has exchanged contracts and is currently waiting for their property sale to fully complete.
There are no fixed repayment rates as such with open bridging loans, but they are usually expected to be paid off within a one-year period. The lender will need evidence of a clear repayment strategy as well as proof of a back-up plan too.
Bridging loans and tight deadlines
If you’ve found the perfect property and want to buy it quickly, a bridging loan is an ideal form of mainstream finance and can help this purchase to complete in a short period of time. It is perfect for instances when you need to move with pace and flexibility. Bridging loans also work against a variety of property types, from building plots to commercial and residential properties.
Why are bridging loans better than bank loans under tight deadlines?
They are short-term
Mortgages from banks are designed for long-term property finance, and usually range from 20 to 35 years at least. Bridging loans on the other hand are specifically designed for the short-term. A maximum term for open bridging loans is typically around a year. This is because the aim of the loan is to temporarily ‘bridge the gap’ when there is a shortfall in funding for the new property.
They can be arranged quickly
Standard mortgage finance arrangements can take a minimum of a few months and can prove to be a much lengthier process during busy housing buying seasons in the year.
Private lenders such as MT Finance can make decisions much faster than banks, since bridging finance is secured solely against the value of the property, as opposed to looking at a full range of one’s personal finances.
In some instances, private bridging loan lenders are able to complete the process of an application and release the funding within just seven working days.
What are the risks of bridging loans?
It is important to ensure that before you take out the loan, you have a comprehensive repayment strategy, as well as a back-up plan. This is because the property will be at risk of repossession should the loan not be repaid at the end of the loan term. This could mean the loss of a huge asset.
In practise however, private bridging lenders have reported very few instances of property repossessions, and intervention can usually come earlier in the form of unfavourable refinance options.