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Bridging Finance – What you need to know
What is a bridging loan?
A bridging loan is a form of short-term loan that is designed to provide a temporary solution to an urgent need for cash flow. The concept of a bridging loan – also referred to as bridging finance – is to allow you to ‘bridge the gap’ while you await a permanent financial solution.
The process of taking out a bridging loan is a simple and straightforward one; bridging loans are extremely versatile, meaning that they are ideal for a diverse range of situations and needs. The criteria that need to be met for a bridging loan application to be approved is far more versatile than the criteria that need to be met for a traditional loan, such as a bank loan for instance. This means that bridging loans are a more accessible borrowing option for many people.
How do bridging loans work?
A bridging loan is secured in a similar way to that of a mortgage, with the bridging finance being secured against your property. In order to be accepted for a bridging loan, you will need to provide some collateral – such as your home, car or other form of security in order to secure the loan.
For example, say you want to buy a new home but your current home has not sold yet, you could use a bridging loan to ensure that you are able to afford the cost of your new property. In a situation like this one, you could secure your bridging finance against both properties, and the bridging loan could act as a short-term solution to your lack of cash flow. By securing a loan against two properties – the one you are selling and the one you want to purchase – you could reduce the cost of the bridging finance and keep your borrowing costs lower.
Is a bridging loan the right option for my circumstances?
In regards to determining whether a bridging loan is the right option for you, the first step is having an assessment undertaken to determine whether a bridging loan is affordable and will be able to be repaid within the necessary time frame.
The key when it comes to whether a bridging loan is the right option for you is affordability – is the loan going to be affordable for you to repay? As long as you’re able to prove that the loan is going to be affordable to repay, you should not have an issue getting your application approved.
How much can you borrow with a bridging loan?
As a rule of thumb, bridging loans tend to be offered in a variety of amounts, but usually start at around £25,000 and go upwards from there. The amount that you will be able to borrow will depend on a range of factors based on your personal circumstances.
In regards to the amount that you want to borrow, this is something that you can discuss with your bridging loan provider.
How much does a bridging loan cost?
What it’s important to be aware of about bridging loans is the fact that a short-term form of finance like a bridging loan, tends to be more expensive than a longer term alternative. What this means is that a bridging loan will be offered with a higher rate of interest than a longer term loan, such as a mortgage, for instance.
Bridging finance is really only offered as a solution to a short-term cash flow problem – hence the higher interest rate for this kind of loan. Bridging finance is not a long-term cash flow solution, it simply acts as a short term solution while a longer term financial approach is determined.
As a rule of thumb, a bridging loan usually comes with an interest rate of around 2% of the amount borrowed. This is significantly higher than the normal interest rate of a bank loan or a mortgage. Usually, this amount does not need to be paid upfront, instead it will be added onto the amount borrowed.
How it works is that the rate of interest will be calculated on a monthly basis, with the rate of interest changing depending on a range of different factors each month. A selection of variables will be used to determine the monthly rate of interest for the bridging finance agreement that is in place.
How are bridging loans repaid?
Usually, bridging loans are provided on the basis of the collateral being offered as security, such as the value of a property, for instance. What this means is that normally, the item that the loan is secured against is used to pay the bridging finance off at the end of the agreed bridging loan period. Or, the bridging loan is replaced by alternative lending such as a mortgage for example.
While the bridging interest repayments are normally accrued on a monthly basis, they can normally be agreed to be paid back at the end of the loan period, instead of being paid back on a monthly basis. This is a benefit of taking out a bridging loan, rather than a more traditional loan type as it makes affording the loan – and the repayments – somewhat easier, regardless of your current financial circumstances.
Do bridging loans come with any other fees?
In addition to monthly repayment rates, it’s also important to be aware that most bridging loans do come with administration fees which will need to be paid for on top of the loan amount and interest accrued.
Usually, you will need to work with a lawyer to ensure that the legal side of your bridging loan application is dealt with properly. In terms of the legal costs that come with taking out this kind of loan, usually, the legal costs tend to be close to the legal costs associated with a mortgage.
Bridging loans also tend to come with valuation fees, which will need to be covered under the repayment agreement. The valuation process needs to be organised and carried out by a qualified surveyor as part of the bridging loan application process.