Bridging loans are a short-term finance option offered to those looking to “bridge the gap” between a debt becoming due and a main line of credit becoming available.
What are bridging loans?
Bridging loans can “bridge the gap” between the sale of a current property and the completion date on the purchase of a new home. This short-term loan option helps to connect the gap between the expected incoming funds from a sale and the outgoing funds from a purchase, so can be useful to facilitate a transaction that might not otherwise take place.
Who can benefit from bridging loans?
Primarily designed for property buyers, bridging loans are aimed at landlords and investors, and can be used for a variety of reasons, including:
- property purchase
These short-term loans will suit those looking to secure the purchase of a new property before the sale takes place in a chain. They can also suit someone planning to buy a property with the aim of selling on quickly once renovated, or for someone wanting to buy at auction and has not the time to go through the process of arranging a traditional mortgage.
Bridging loan interest rates
Similar to mortgages, bridging loans have rates that can be fixed or variable. A fixed rate means that the same interest rate applies across the term of the loan, so that each monthly payment remains the same. With a variable rate, the interest rate may change - meaning that your monthly payments can fluctuate and go up or down.
Types of bridging loan
There are two main types of bridging loan - closed bridge and open bridge loans.
Closed bridge loans
A closed bridge loan is where the borrower has a fixed date in place to repay the loan. It is generally used when the borrower knows that a source of funds will be available to repay the loan before the end of the term. This may suit someone who has exchanged contracts, but has to wait until the completion date to be able to repay the bridging loan.
Open bridge loans
An open bridge loan has no fixed date, and could be used when someone wishes to settle a transaction in a short space of time - it is likely that the planned exit will be through the sale of the property. This type of loan could also be used by buyers who have found a house to buy but have not yet sold their existing property, or by an investor wishing to buy, renovate and then sell before repaying the bridging loan.
Bridging loans offer short-term access to money at high rates of interest, and can prove more expensive that other finance options. Yet, their flexibility and short-term availability can be invaluable for those who need the money quickly; need to conclude a transaction to secure a property; or simply have not had the time to arrange alternative funding.