Finance, Get Funded, Lending

What Are Bridging Loans?

Business Advice | 16 November 2022 | 2 years ago

If you need to borrow money for a short period of time, a bridging loan could be exactly what you are looking for. The aim of this type of loan is to ‘bridge the gap’ between selling a home and buying a home. If you want to buy a new home and you haven’t sold your old one, a bridging loan ensures that you have the money to move forward. Once you have sold your old property, you can repay the bridging loan.

Bridging Loans vs. Other Loans

There are a number of reasons to choose a bridging loan over other loans, one of which is how quickly a bridging loan can be arranged. Whereas some loans can take a while to be finalised, a bridging loan is a quick solution to property cash flow problems. Bridging loans also have the benefit of being paid back in one go, at the end of your loan contract. Whereas other loans usually require a monthly payment, which increases your outgoings at a time when money is likely to be tight, bridging loans do not.

Why Use Bridging Loans?

There’s a lot of flexibility with bridging loans, and there are a whole host of interest rates available. This means that you shouldn’t struggle to find a bridging loan that works for you. You also have the option of choosing a closed bridging loan or an open bridging loan; the former has a fixed repayment date and the latter does not.

How do Bridging Loans Work?

When you find a property to buy, you will want to move quickly to ensure it’s not snapped up by anyone else. Unless you have already sold your current property, it’s unlikely that you will have the money to move forward, which puts a halt on proceedings. With a bridging loan, you are given the money needed to buy your new home, without having to worry about whether or not your current home is sold.

Bridging Loan Interest Rates

The interest rates on a bridging loan vary hugely depending on the lender and the type of bridging loan you choose, but they tend to have an APR of between 6.1% and 19.6%. This is a lot higher than standard mortgages and many loans, making them a more expensive option.

Cost of Bridging Loans

As well as the interest rates, there are other fees associated with bridging loans. The price of a bridging loan is usually done on a monthly basis, rather than annually as is the case with most other loans. This is because bridging loans are generally only taken out for a short amount of time. Most bridging loans have fees of between 0.5% and 1.5% per month, and you can expect a set up fee of around 2%. This is why bridging loans are not an ideal long term borrowing solution.

How to Get a Bridging Loan

There are a number of specialist brokers and lenders that offer bridging loans, and getting one is a case of applying to see if you are eligible. Every lender will have slightly different requirements for bridging loan eligibility, which is why it’s always a good idea to shop around and consider your options.

Who Provides Bridging Loans?

A lot of lenders, brokers and mortgage companies provide bridging loans. As a bridging loan is usually secured against your home and assets, it tends to be specialist providers offering them.

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