What are Bridging Loans and Why They are Beneficial

Financial loans come in all shapes and sizes and are available for a multitude of uses. Sometimes an individual will need to arrange a loan so that they can make a substantial purchase or a new car or home. Other times, a loan might be needed to help a family get over a rough period where one member may have lost their job. This is especially true in these difficult times we find ourselves with Covid-19, which has affected people and businesses all over the world.

Whatever the reason, there are a number of businesses that can help when it comes to arranging a loan, and they are not something that you need to rely on solely through your high street bank. 

What is a bridging loan?

There are some situations where an individual might need to borrow money to help them in the situation where they are buying a new home, but have not yet sold their old one. This type of loan is known as a bridging or bridge loan. 

An example of when a bridging loan may be required would be during a property auction, where someone has purchased a property and needs the money right away to pay for the purchase. Not everyone will have any substantial savings that they can dip into, and a loan is going to be the only viable solution until they are able to sell their current property.

The types of bridging loan

There are two types of bridging loan. A closed bridging loan is one where there is a definite repayment date. This type of loan is usually given in situations where contracts have been exchanged and you are simply waiting for the sale of your property to be completed.

The other type is an open bridging loan where there isn’t a fixed repayment date, though payment will be expected to be paid off within a period of 12 months. 

Before either type of loan is given, the lender will need to be shown a clear and concise repayment strategy from the individual borrowing the money. This can be in the form of equity from the sale of a property or a mortgage that has been taken out. It’s important to compare bridging loans to make sure you are getting the best possible option.

Many lenders will also want to see details of the new property that you have purchased including the price and the repayment plan, as well as information as to what you are doing in order to sell your current property if that is the case.

What can you borrow?

The amount that you can borrow with a bridging loan is dependent on a number of factors, but it can range from anything from a few thousand pounds, up to several million. It all depends on the value of your property against which you are securing the loan. 

Some individuals will borrow against multiple properties that they may have, which will allow them to borrow a much higher amount for the bridging loan. 

Benefits of a bridging loan

There are a number of advantages of using a bridging loan in comparison with other types of financing. In most cases, bridging loans are only required for a short period of time, usually between 3-6 months, and they usually provide the cheapest solution for generating the required funds.

Another benefit is that they are usually very quick to arrange. The requirements from the lenders are very quick and easy to process, without the need of any extensive time-consuming checks. 

Some other advantages are that you are able to maintain your place in the property chain, so that if a potential buyer backs out at the last moment, it doesn’t signal that you’ve lost your new dream home. The purchase can still go ahead while you look for a new buyer for your existing property.

It can also mean that you won’t have to move into a rented property between purchasing your new home and selling your old one, in addition to avoiding having to put all of your possessions into storage until the deals are completed.

Some concluding thoughts

There are a number of situations where a bridging loan will be the best solution, and the great thing with them is that they are nearly always for a very short period of time, so you won’t have a loan hanging over you for many years, which is especially important at the moment with the uncertain times we are facing due to the Covid-19 pandemic.

Different lenders will charge different rates and fees, so before agreeing on a bridging loan, it’s a good idea to spend a little time looking for the best options and comparing different lenders so that you can find the best option.