What Is a Bridging Loan?
A bridging loan is a temporary financial solution utilised until an individual or company secures long-term funding or settles an existing obligation. This type of loan offers the borrower a means to fulfil current commitments by delivering immediate liquidity. Generally, bridging loans carry relatively elevated interest rates and are often supported by some form of collateral, such as property or a business’s inventory.
Frequently employed in the property sector, these loans are also referred to as bridging finance or simply bridging loans.
KEY POINTS
A bridging loan is a short-term financial option used until an individual or company acquires long-term funding or resolves an existing commitment.
Property transactions commonly involve bridging loans, but various businesses also utilise them.
Property owners can utilize bridging loans to purchase a new investment property while waiting for their existing one to be sold.
How a Bridging Loan Functions
Bridging loans, also known as interim finance, gap finance, or swing loans, fill the void during periods when funding is required but not yet accessible. Both individuals and businesses use bridging loans, which lenders can tailor for a wide range of circumstances.
Bridging loans can assist Property owners in acquiring a new investment property while awaiting the sale of their current investment property. Borrowers utilise the equity in their existing property for the deposit on a new property purchase whilst waiting for their current property to sell. A bridging loan provides the Property owner with additional time and, more often than not, some peace of mind during the waiting period. However, these loans generally carry a higher interest rate than other credit facilities.
Bridging loans combine the mortgages of two properties, providing the buyer flexibility whilst waiting for their previous property to sell. However, in most instances, lenders offer property bridging loans amounting to 80% of the combined value of the two properties, meaning the borrower must have substantial property equity in the original property.
Businesses utilize bridging loans when awaiting long-term finance and needing funds to cover expenses in the meantime. For instance, consider a company expecting to close a round of equity financing in six months. It may choose to use a bridging loan to provide working capital to cover expenses such as payroll, rent, utilities, inventory costs, and other expenditures until the funding round is completed.
Example of a Bridging Loan in the UK Region:
Imagine a couple, Jane and John, who currently own an investment property in London. They have found another investment property in the same city, but they need to sell their existing property to finance the purchase. However, the property market is moving quickly, and they fear they may miss out on their new property if they wait to sell their current property first.
In this scenario, Jane and John could apply for a bridging loan to secure the necessary funds to purchase the new investment property while they wait for their existing property to be sold. The bridging loan would use the equity in their current property as collateral, allowing them to put down a deposit on the new property and complete the purchase. This gives Jane and John the time they need to sell their existing property without the pressure of potentially missing out on the new property.
Once their existing property is sold, Jane and John can use the proceeds from the sale to repay the bridging loan, which is typically designed to be a short-term solution. However, it is important for Jane and John to consider the higher interest rates and fees associated with bridging loans compared to traditional loans, and to have a clear plan for repaying the loan as soon as their current property is sold.
Bridging loan can be a valuable tool for individuals and businesses in the UK region to cover temporary financial gaps, particularly in the property market. However, it is crucial to assess the costs and risks associated with such loans and to have a clear repayment strategy in place.
Bridging Loans vs. Traditional Loans
Bridging loans typically have a quicker application, approval, and funding process than traditional loans. However, in exchange for the convenience, these loans tend to have relatively short terms, high interest rates, and sizeable origination fees.
Generally, borrowers accept these terms because they require fast, convenient access to funds. They are willing to pay high interest rates because they know the loan is short term and plan to pay it off quickly with low-interest, long-term financing. Moreover, most bridging loans do not have repayment penalties.
What are the advantages of bridging loans?
Bridging loans offer short-term liquidity. For instance, a property owner can utilise a bridging loan to acquire a new investment property before selling their existing one.
What are the disadvantages of bridging loans?
Bridging loans typically have higher interest rates than traditional loans. Also, if you are waiting to sell your investment property and still have a mortgage, you will have to make payments on both loans.
Bridging loans are a short-term financing option used by individuals and businesses to cover financial gaps when permanent funding is not yet available or an existing obligation needs to be settled. These loans are common in the property market, helping individuals purchase a new investment property while waiting for their current investment property to be sold. Additionally, businesses may use bridging loans to cover expenses while waiting for long-term financing. The loans typically come with higher interest rates than traditional loans and require collateral, such as property or inventory.
In the UK, where can I obtain a bridging loan?
Various sources in the United Kingdom provide bridging loans, with Bridge Direct being a prominent option. Boasting over 35 years of expertise in bridging, the Bridge Direct team has extensive knowledge in the field. As a direct lender rather than a broker, they possess immediate access to funding.
Offering instant decisions on all applications without charge, Bridge Direct is a direct lender that caters to a wide range of clients. Regardless of your credit history, Bridge Direct is open to considering your application for a bridging loan.
In conclusion, bridging loans serve as a temporary financial solution for individuals and businesses awaiting long-term financing or the resolution of existing obligations. Although they come with higher interest rates and often require collateral, they provide the necessary liquidity to fulfil immediate commitments. It is crucial for borrowers to consider the pros and cons of bridging loans and make informed decisions based on their specific financial circumstances.