A bridging loan is a short-term financial product designed to provide interim funding until a more permanent and long-term financial solution can be arranged. It bridges financial gaps and is often used to facilitate property transactions or meet urgent financial needs.
Bridging lenders lent out a record-breaking £278.8 million in bridging loans during the first quarter of 2023. One of the main uses of bridging loans is to make large purchases or investments that are time-sensitive such as buying a house on auction. This guide aims to explain more uses of bridging loans, as well as how they work.
How Does a Bridging Loan Work?
Sometimes a borrower needs access to a large amount of money very promptly, and they ask a lender for this money with the expectation of repaying it in a short window. The lender assesses the borrower’s creditworthiness, income, and the value of the property or assets being used as collateral.
The loan’s approval process is usually a lot faster than traditional mortgages since bridging loans are intended for short-term use. The money is then sent to the borrower promptly. It is often used for things like the purchase of a property in cash.
Once the borrower sells the property or arranges long-term financing, they can repay the bridging loan in full, along with any accrued interest and fees. The interest is usually higher than for a traditional mortgage.
What Are Bridging Loans Usually Used For?
Property Transactions
Individuals or property developers can use bridging loans to purchase a new property before the sale of their existing property is finalised. The sale of their existing property is then used to pay off the loan quickly.
Property Development
Investors and developers may use bridging finance to fund property renovations, refurbishments, or conversions.
Business Issues
Businesses can use bridging loans to cover short-term cash flow issues, invest in new opportunities, or fulfil unexpected financial obligations.
Property Auctions
Bridging loans are popular among buyers at property auctions, as they offer quick access to funds needed to secure the property within tight deadlines. Usually you need to pay in full during these auctions, not just the deposit, so bridging loans come in very handy.
Emergency Expenses
Bridging loans can be used to handle unforeseen expenses or emergencies when immediate access to funds is required. This includes hefty medical bills.
What Is the Loan-To-Value (LTV) Ratio for a Bridging Loan?
Bridging loan lenders typically offer LTV ratios ranging from 70 to 80% LTV, depending on the perceived risk associated with the loan and the market value of the property. A lower LTV ratio implies a lower loan amount relative to the property’s value, which can help mitigate the lender’s risk.
Some lenders will offer 100% LTV bridging loans, but this extra risk often means that borrowers will need to provide additional security. This could be, for example, securing the loan against a property.
What Is the Loan Term for a Bridging Loan?
Bridging loans are designed for short-term use and usually have terms ranging from one month to one year. However, some lenders may offer more extended terms, depending on the borrower’s specific requirements and the lender’s policies.
How Long Does It Take To Get a Bridging Loan Approved?
While the exact timeline can vary among lenders, borrowers can typically expect a decision within a few days to a few weeks. The approval process for a bridging loan is generally a lot quicker than that of traditional mortgages.
Can People With Bad Credit Apply for a Bridging Loan?
Yes, borrowers with bad credit can apply for a bridging loan. While a good credit score improves the likelihood of loan approval and favourable terms, some lenders specialise in providing bridging finance to borrowers with less-than-perfect credit histories.
Deedle does not discriminate. If you have a bad credit history, you are still welcome to use our service, and we can find a lender who will not reject you based on your credit score. However, borrowers with bad credit should expect to face higher interest rates due to the increased risk perceived by the lender.
Can Bridging Loans Be Used for Auction Purchases?
Yes, bridging loans are commonly used for auction purchases. Property auctions often require buyers to complete the purchase within a tight timeframe, typically 28 days from the auction date. Traditional mortgages might not be suitable in such situations, as they often involve longer processing times.
With a bridging loan, buyers can secure the property and complete the purchase within the required timeframe. Once the property is acquired, buyers can explore longer-term financing options, such as traditional mortgages or refinancing, to repay the bridging loan.
Can I Repay a Bridging Loan Early?
Yes, borrowers can repay a bridging loan before the agreed-upon term ends. Early repayment is generally allowed, but borrowers should be aware that they may be subject to early repayment charges or exit fees. These charges compensate the lender for the loss of interest income that would have been earned if the loan had been repaid over the full term.
Can Bridging Loans Be Extended if Needed?
In some cases, lenders may agree to extend the term of a bridging loan if the borrower faces unforeseen delays or challenges in repaying the loan within the agreed-upon timeframe. However, loan extensions are not guaranteed and are subject to the lender’s discretion and assessment of the borrower’s financial situation.
Concluding Thoughts
Bridging loans can be a valuable financial tool for individuals and businesses, providing quick access to funds for various purposes, particularly in property transactions and business scenarios. However, borrowers should carefully consider their financial situation, the terms, and the associated costs before opting for a bridging loan.
Seeking professional financial advice is recommended to make informed decisions and find the most suitable financing solution for individual needs and circumstances. Deedle’s professional mortgage advisors can talk you through the process and even find you the best deals on bridging loans. Apply now and get a fast, free, objective quote.
