How Do Bridging Loans Work? Understanding The Basics

A bridging loan is a form of short-term finance that "bridges the gap" between an immediate need for funds and their availability. For example, a bridging loan for land can help developers and investors purchase land and start developing it to take advantage of a time-crucial situation. Below are some insights to help you better understand the basics of the question "How do bridging loans work?".

Understanding Bridge Loans

Bridge loans (also called bridging finance), are short-term gap financing options that give you access to funds to cover gaps between key transactions. For example, a bridge loan is a perfect solution to turn to if you want to acquire a new property while awaiting the sale of your current one. You can also take a bridge loan as a short-term business capital injection or to buy land that needs planning permission before you get a mortgage.

How Bridging Loans Work

Bridging loans come in open and closed options. With a closed bridging loan the exit strategy is established from the outset, you and your lender decide on the terms and repayment date and the application process is more straightforward.

Alternatively, there is no fixed repayment date in place for an open bridge loan. Open bridge loans are riskier and borrowers are less likely to receive this type of bridge loan. A possible example of an exit strategy for an open bridge open is the sale of a property, but the property has not been put on the market yet. Lenders are likely to demand proof of an acceptable repayment plan before giving you this type of loan. Your lender may also demand details of the property you are buying and your plans to find buyers for your present property.

First And Second-Charge Bridge Loans

An assessment will be carried out on your property when you accept a bridging loan and a charge added to it. This charge is a binding deal that outlines which lenders you will pay back first if you can't repay all of what you owe. As such, your property will become collateral to pay off your lenders in order of importance.

Also, you will receive a first charge bridging loan if you are the outright owner of your property or are paying off your mortgage with a bridging loan. This arrangement requires you to prioritise your bridging loan when repaying debts. Therefore, you must first pay back your bridging loan lenders before settling with other creditors.

On the other hand, if your property has a mortgage, you can look forward to a second-charge loan. This arrangement will require you to prioritise your mortgage over the bridge loan when repaying debts after defaulting.

Bridging Loan Charges

Bridging loans have monthly instead of yearly interest due to their short-term nature. Also, they have higher rates than your average mortgage. All fees and chares will depend on the circumstances of the loan but in addition to the interest due, there are other considerations such as arrangement and admin fees, exit fees, legal fees, plus broker fees. All fees will vary from lender to lender which is why it is so important to discuss your options with a trusted broker.

Are Bridging Loans Right For Me?

Bridging loans can ensure you can access fast, short-term funding. But they might not suit your circumstances.

When considering your options always have in mind; how much you need to borrow, the value of your assets, the loan duration, if there is a mortgage on the property, and how you intend to pay back the loan. Understanding all these key factors will help your bridging loan process.