Bridging loans, also known as bridge loans, are a type of short-term financing that is used to bridge the gap between purchasing a new property and selling an existing one, or arranging longer term finance.
The main purpose of a bridging loan is to provide the borrower with the necessary funds to complete the purchase of a new property before the sale of their existing property is completed. It may also be used to release funds from an existing property to fund redevelopment or refurbishment prior to putting in place a larger mortgage. Traditional mortgages will often have conditions which restrict how much redevelopment can be done on a property.
The normal process of obtaining a bridging loan starts with a borrower applying for the loan with a lender. The lender will then assess the borrower's creditworthiness and the value of their existing property to determine their eligibility for the loan. Once the loan is approved, the lender will provide the borrower with the funds to complete the purchase of the new property.
One of the key features of a bridging loan is that the loan is secured against the borrower's property. This means that if the borrower is unable to repay the loan, the lender can take possession of the property to recover their funds.
Bridging loan rates vary depending on the lender and the specific terms of the loan. Generally, the interest rate on a bridging loan is higher than that of a traditional mortgage, as the loan is considered to be higher risk due to its short-term nature.
Additionally, many lenders and brokers will also charge additional fees, such as arrangement fees or exit fees, which can add to the overall cost of the loan.
When considering a bridging loan, it is important to use a bridging loan calculator to get an estimate of the total cost of the loan, including interest and any additional fees. This can help you to determine whether or not a bridging loan is the right choice for your situation and can also help you to compare the rates and fees offered by different lenders.
It's important to note that bridging loans are typically only available to borrowers who own a property and have a strong credit history. Additionally, most lenders will require that the borrower have a clear exit strategy in place, such as a refinance or the sale of their existing property, in order to qualify for a bridging loan.
Once the loan is approved, the borrower can use the funds to complete the purchase of the new property, or release funds from an existing property. Once the existing property is sold, or longer term finance is arranged, the borrower can then use the proceeds from the sale to repay the bridging loan.
Overall, bridging loans can be a useful solution for those looking to purchase a new property before the sale of their existing one is completed. However, it is important to consider the high interest rates and additional fees associated with these types of loans, and to use a bridging loan calculator to determine the total cost of the loan before making a decision. It is also important to have a clear exit strategy in place and ensure that you are making the best decision for your financial situation.