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What is a Bridging Loan?

c/o UK Property Finance
(Image credit: UK Property Finance)

CONTENT SUPPLIED BY UK PROPERTY FINANCE

It’s no secret that buying a property in the UK has become increasingly difficult. Since 2013, Britain as a whole has been predominantly a sellers’ market, with little respite for the average buyer. Competition for affordable homes in key locations is ferocious, making the prospect of investing in property somewhat daunting.

When faced with such staggering competition, time is of course a factor. If somebody beats you to the punch before you secure the purchase funds needed, it’s game over. The problem being that a typical mortgage can take anything from 8 weeks to 12 weeks to process. Simply obtaining a final decision on your application can sometimes feel like pulling teeth.

With the UK’s major High Street lenders, this is simply the way of everyday mortgage loans. Set your sights beyond the High Street however and you’ll find a growing network of alternative funding specialists. Independent brokers and lenders who’ve pulled rank to diversify their portfolios, spurring a silent yet accelerating property finance revolution.

What is a Bridging Loan?

For the time being, the idea of bridging finance remains alien to most everyday borrowers but research suggests that the volume of bridging loan applications and total loan completions are accelerating like never before.

The question is – what is so appealing about bridging finance? Or more importantly, how does it differ from conventional High Street borrowing?

As the name indicates, bridging finance is designed to ‘bridge’ a temporary financial gap. By definition, a bridging loan is a short-term loan for a comparatively large sum of money. Typical bridging loans are repaid in full no longer than 12 months after being issued, in one lump-sum and including most borrowing costs. The APR attached to a bridging loan will always be higher than a traditional mortgage interest rate, due to the short-term nature of the transaction.

The unique appeal of bridging finance lies in the convenience and accessibility. Subject to status and depending on who you work with, a bridging loan can be processed and paid out within 24/48 hours. So rather than waiting months for the funds needed to purchase a property, they could be with you in the next few weeks.

Just a few popular applications for bridging loans include the following:

  • Purchasing a property while waiting for your current home to sell
  • Paying for urgent repairs and/or property improvements
  • Meeting unexpected business costs or tax obligations
  • Refurbishing a property prior to selling for profit
  • Picking up a property at auction for a bargain price

Where time is a factor, a bridging loan could prove significantly more viable than a conventional loan or mortgage.

Types of Bridging Loans

Bridging loans are available in various different shapes and sizes, tailored to suit the requirements and budget of the borrower, however, all bridging loans are secured on appropriate collateral, typically in the form of the borrower’s land or property or combination of both. Applicants may choose to apply for a closed or open bridging loan, the specifics of which are detailed below:

Closed Bridging Loans

A closed bridging loan specifies the exact repayment date at the time the loan is agreed. The borrower indicates exactly when they intend to repay and how they’ll fund the repayment, known in the business as their ‘exit strategy’. If you can guarantee repayment on a specific date ahead of time, your application is more likely to be accepted quickly and overall borrowing costs may be reduced.

Open Bridging Loans

Conversely, open bridging loans are provided when the applicant cannot outline the date of a concrete exit strategy. There will still be a deadline for repayment, but the applicant doesn’t specify a date or indicate how they intend to fund the repayment. As a result, it may be more difficult to qualify and borrowing costs may be elevated.

How Much Can I Borrow?

Some lenders establish a minimum bridging loan value of £10,000 with no upper limits, however, there’s plenty of flexibility as loans are issued in accordance with the security (collateral) provided by the applicant.

What’s a Typical Bridging Loan Interest Rate?

Interest rates and overall borrowing costs vary wildly, in accordance with the lender, the size and nature of the bridging loan, the security provided by the applicant, the length of the loan term and so on. Comparing the market in full before going ahead should be considered mandatory as should using an online bridging loan calculator to gauge value for money.

As a rough estimate, you could be looking at a monthly interest rate of anything from 0.40% up to 1.0%. Your broker will help you consider the available options, in order to minimise interest payments and borrowing costs where possible.

Whether you’re looking to buy a home as a place of residence or an investment for business use, the UK’s borrowing landscape is more versatile than ever before. For more information on bridging loans or any aspect of property finance, contact the team at UK Property Finance.