The advent of bridging loans in the UK has been on the rise, expanding in ways that have not been seen ever before. So what exactly does it mean to have a bridging loan? What are the benefits of obtaining, and why are they different from most of the other financial products on the market?
How Would You Use a Bridging Loan?
If you are looking for a short-term loan, that is designed to be interest-only, a bridging would be a great way to get the money needed for property investment. They can also be used for many other purposes and may be utilized by people waiting to sell the property – which is why they are called bridging loans because they provide a bridge of temporary finance. They are also beneficial when you are upgrading properties, refurbishing them, or adding extensions, perhaps work that must be done before everything is sold for a profit. If you are an investor, and you have properties that you would like to purchase right away, these are the perfect loans to obtain. Essentially, they can be used for any purpose.
Different Types of Bridging Loans
There are a couple of different types:
Closed Bridge. These loans give the borrower the money that they need if they have an exit strategy in place and a way to guarantee its repayment. This will allow the lender to feel confident that the loan will be paid back.
Open Bridge. These loans are not designed with an exit strategy. They are open-ended, yet they will typically be provided for up to one year in most cases.
The lending criteria that was once used is no longer the primary reason that bridge loans are provided to the general public. It doesn’t matter what type of exit strategy you have because it simply needs to make sense before the lender will agree to your request.
How Do They Work?
High Street lenders tend to not offer their clients bridging finance UK. This has left a sizable gap which smaller lenders have recognized, which is how they are providing bridging loans, quite successfully, to candidates that will only need the money for just a few days.
Using existing property or land to secure the bridging loan, people can acquire these quite easily. It is also very important to have some proof of income, as well as a good credit rating.
Loans that are taken out, which will include all the fees that you will have to pay, the net value of the loan, and interest, tend to represent up to 80% of the value of any property that you want to purchase. There are negotiable limitations that every lender will offer.
There are brokers that do offer bridging loan assistance, providing you with a comparison of different loans available so that you can obtain the best deal.
The bottom line is that the amount that you owe, which will also include interest and borrowing costs, must be repaid, usually within a few months, in one lump sum.
The Benefits of Bridging Loans
It is best to work with companies that offer quality bridging loans, and these are factors to consider before you take one out:
Speed. There are some loans that you can obtain within days.
Deferred payments. Typically, no repayment needs to be made until the date that is agreed upon.
Flexibility. These loans are much more accessible, and also flexible, by comparison to mortgages and other types of loans.
The Drawbacks of Bridging Loans
There are some downsides to consider before taking these out:
Extremely High Interest. By comparison to standard loans, the interest rates are excessively high.
Collateral. Without some form of collateral, you may not be able to take out any of these loans.
Fees. There are some lenders that will add on multiple fees including completion, processing, and administration fees which can become very expensive.