08.05.08
Bridging Loans: An introduction
Bridging loans are simple short-term loans that are used to take advantage of opportunity. A borrower would use a bridging loan while securing a long-term loan or waiting to receives a lump sum. This money is used to settle the bridging loan.
The bridging loan can be used in any situation where money is required urgently but can still be paid back in the short term. Many people use home bridging loans in the UK to secure a property while waiting for another to sell. The loan is a popular and easy way to secure a home without the risk of being homeless by selling your home first and waiting for an opportunity to buy another.
This loan is also used by business owners seeking to get finance to maintain business activity while waiting for equity, such as a major customer settling an account, a major investor putting funds in the company, or a capital raise through the share market etc. The loan is only available if the borrower expects some sort of income to pay it off in the short term.
This article focuses on the benefit and risk of using a bridging loan when buying and selling property.
Bridging Loans are ‘Unusual’ Loans
Bridging loans are often classed as a loan given in unusual circumstance and as such are very flexible. A bridging loan is often more flexible and quicker to approve than most other types of loans, because it is specifically packaged to take advantage of an opportunity.
The effectiveness of a bridging loan would be lost if it required a lengthy approval process. A bridging loan is usually approved and financed within two or three days. Whereas mortgages are usually pre-approved then after the purchase price in finalized the application is processed all before finance becomes available. Sometimes this process can take longer than the settlement period on a contract.
Because of its flexibility the bridging loan is often a useful line of credit for people in negotiation and it makes the financing process a lot easier. There are bridging loans that require a regular repayment, but the borrower can also negotiate to only pay a lump sum when the loan expires.
The Benefit of Bridging Loans
Rather than allowing circumstances to dictate how a homeowner plays the property market, a bridging loan helps property owners take control. For example, with a bridging loan to buy property anyone can benefit in a buyer’s market when a good deal can be secured, but they are having trouble selling a property. Then when they get the sale price they are asking for, the loan can be settled.
Lenders can provide bridging loans for an expiry period from a few weeks to several years. This allows borrower some flexibility when selling a house. They do not have to meet the market, but wait to get the price they are asking.
The bridging loan is also used by a borrower to take advantage of any discounting for prompt payment. This is not often offered in the property market, but if a contract is dragged out for a long period of time with extension after extension then the expenses of buying a new home can rise.
Before considering a bridging loan to take advantage of an opportunity it should be weighed up against a bridging loan’s cost. While the bridging loan can reduce the risk of a deal breaking down or opportunity missed, there are some obvious risks to be considered before applying for a loan.
Risks of Bridging Loans
Although bridging loans are powerful financial tools they can cause problems, particularly for borrowers who are rushed into a decision trying to take advantage of an opportunity. There are many stories of people taking out bridging loans unaware of the cost involved then discovering it outweighed any advantage the loan provides.
The interest on these loans is often higher because the loan is flexible, short term and a higher risk to the lender than a mortgage.
The loan is also based on valuations and assumptions that a lump sum, such as the proceeds from the sale of a property, will cover the bridging loan.
Where can I find bridging loans?
Most commercial lenders offer bridging loans and the best options to compare loans is to visit websites that offer loan comparison services. There are so many options with bridging loans it is often difficult to find the right one by visiting individual lenders. By visiting comparison sites a borrower can look at a combination of bridging loan quotes. Some websites provide information on what to look for when shopping around for a bridging loan.
The Financial Services Authority (FSA) also provides information for customers, and it is advisable to source a loan from a lender with FSA accreditation.
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