The Ultimate Guide to Bridging Loan
Table of Contents
Introduction to bridging loans
How bridging loans work
Types of bridging loans
The benefits of bridging loans
The drawbacks of bridging loans
How to get a bridging loan
The cost of bridging loans
Where to find bridging loans
Conclusion
Introduction to bridging loans
A bridging loan is a short-term loan that is used to bridge the gap between two sources of finance. They are typically used by property investors and developers, but can also be used by businesses and individuals.
Bridging loans are secured against property, which means that the lender can take possession of the property if the borrower defaults on the loan. This makes bridging loans a riskier investment for lenders, which is why they tend to have higher interest rates than other types of loans.
How bridging loans work?
Bridging loans typically have a term of 12 months or less. The borrower can repay the loan in full at the end of the term, or they can refinance the loan with a longer-term mortgage.
The amount of money that can be borrowed with a bridging loan depends on the value of the property that is being used as security. The maximum loan-to-value (LTV) ratio is typically 75%, but some lenders may offer higher LTVs.
The interest rate on a bridging loan is variable, and it is usually linked to the Bank of England base rate. The borrower will also have to pay arrangement fees and other charges.
Types of bridging loans
There are two main types of bridging loans:
Repurchase bridging loans: These loans are used to buy a property while the borrower's existing property is being sold.
Development bridging loans: These loans are used to finance property development projects.
There are also a number of sub-types of bridging loans, such as:
Asset-based lending: This type of loan is secured against assets other than property, such as shares or intellectual property.
Purchase and refurbishment loans: These loans are used to buy a property that needs to be renovated.
Commercial bridging loans: These loans are used to finance commercial property transactions.
The benefits of bridging loans
Bridging loans can be a useful tool for property investors and developers who need to access funds quickly. They can also be used by businesses and individuals who need to bridge a short-term cash flow gap.
Some of the benefits of bridging loans include:
Speed: Bridging loans can be arranged quickly, which can be important if the borrower is under time pressure.
Flexibility: Bridging loans can be tailored to the borrower's specific needs.
Security: Bridging loans are secured against property, which gives the lender some protection in the event of default.
The drawbacks of bridging loans
Bridging loans also have some drawbacks, such as:
High interest rates: The interest rates on bridging loans are typically higher than other types of loans.
Short terms: Bridging loans typically have short terms, which can make it difficult to repay the loan if the borrower's plans change.
Fees: Bridging loans often have high arrangement fees and other charges.
How to get a bridging loan
To get a bridging loan, the borrower will need to provide the lender with a number of documents, such as:
Proof of identity and address
Proof of income
Proof of assets
A valuation report on the property that is being used as security
The borrower will also need to have a good credit score.
The cost of bridging loans
The cost of a bridging loan will depend on a number of factors, such as the amount of money being borrowed, the term of the loan, the borrower's credit score, and the lender's risk appetite.
The typical interest rate on a bridging loan is around 10%, but it can be higher. The borrower will also have to pay arrangement fees and other charges.
Where to find bridging loans
Bridging loans can be obtained from a number of lenders, including banks, specialist bridging loan providers, and peer-to-peer lenders.
It is important to shop around and compare different lenders before choosing a bridging loan.
Conclusion
Bridging loans can be a useful tool for property investors and developers who need to access funds quickly. However, they are a high-cost form of finance, so they should only be used as a last resort.
If you are considering a bridging loan, it is important to carefully consider the benefits and drawbacks before making a decision. You should also get independent