Bridging Loan Pros & Cons
Recent years have seen the UK bridging loans market grow, expand and diversify like never before. But what exactly is bridging finance? Or more importantly, what are the benefits of bridging loans, over and above more traditional financial products?
Uses of Bridging Loans
Bridging loans are short-term interest-only loans, which are typically used to cover the costs of property investments. Bridging finance amongst other varied uses, can be used by borrowers to purchase properties while awaiting the sale of their existing property – effectively ‘bridging’ this temporary financial gap. They are also often used to cover the costs of large-scale property refurbishments, upgrades and extensions, prior to the property being sold-on for profit. Investors looking to buy properties quickly at auctions also often rely on bridging finance. Bridging finance can be available for virtually any legal use.
Types of Bridging Loans
There are two primary types of bridging loans:
- Closed Bridge. A ‘closed’ bridge refers to a loan provided to a borrower who already has a guaranteed repayment plan or ‘exit strategy’ in place. It means the lender knows exactly how and when the loan will be repaid.
- Open Bridge. An ‘open’ bridge refers to any bridging loan provided where no specific exit date or plan is provided. Open loans typically run for a fixed period of six months to one year.
In reality, funders no longer base lending criteria on whether the loan is an open or closed bridge. All exit strategies are scrutinised to prevent defaults and if the exit does not make sense, the loan will not be agreed.
How Bridging Loans Work
Across the UK, High Street lenders no longer offer bridging finance to their clients. This withdrawal has left a gap in the market that has been filled by smaller lenders offering access to bridging loans, with successful applicants on occasions accessing the funds they require within no more than a few days.
- Bridging loans are typically secured on existing properties or land owned or being purchased. Proof of income and strong credit ratings may therefore not be required.
- It’s usually possible to borrow up to a maximum gross loan (net loan + all fees and interest etc) of 75%/80% of the value of the property you wish to purchase. Limitations vary between lenders and are often negotiable.
- Bridging brokers compare the services offered by dozens of providers across the UK to find the best deals.
- The total amount owed including interest and all borrowing costs are usually repaid in one lump sum within no more than a few months to one year.
The Pros of Bridging Loans
Quality bridging loans bring a variety of unique benefits to the table, including but not limited to the following:
- Speed. Some bridging loans are paid out within a matter of days.
- Deferred Payment. It is usually not necessary to repay a single penny of the loan until the agreed repayment date at the end of the term.
- Flexibility. Bridging loans are generally more flexible and accessible than conventional loans and mortgages.
The Cons of Bridging Loans
However, there are also some downsides to factor into the equation, such as:
- High Interest. The comparatively high interest rates attached to bridging loans make for steeper borrowing costs on longer terms.
- Collateral. It may be impossible to qualify for a bridging loan in the first place, without enough equity to guarantee the loan.
- Fees. Many lenders charge a variety of administration, processing and completion fees which quickly add up.
The table below resembles a typical bridging loan repayment rate of 0.44%, over a 12-month term exc. broker fees
|Bridging Loan Amount||Repayment Amount (excl. broker fees etc)|
|Bridging Loan Amount||Loan Repayment Amount|
First-charge bridging loans on your own residential property are always regulated by the Financial Conduct Authority or FCA, meaning that the lender must follow several important operational rules. However, the same rules may not apply in the case of first charge loans on investment and commercial properties – consult the Financial Ombudsman Service directly if you encounter any issues.