While bridging loans UK are growing in popularity, is this type of alternative finance for you?
For many potential borrowers, particularly those with a property to use as security, the answer is increasingly ‘Yes’.
A bridging loan is a type of short-term finance that is used for a range of purposes.
Traditionally, they were used by property owners and homeowners to buy a new property before they had sold their current home so they did not miss out on a property they wanted to buy.
This meant that for a short time they had two homes but knew that when they sold their first home then the proceeds would pay off the bridging loan and they would, potentially, secure a mortgage on the second property.
Others used bridging finance to repair a broken property chain should someone in that chain of buyers pull out while others used the money to build their own home.
Bridging finance has also been used to convert a barn or develop other types of property, particularly to bring it up to a standard that may attract a mortgage from a traditional lender.
Bridging finance has also proved popular with landlords and developers who can buy property at auction and know that they can complete the bridging finance application in time to meet the deadline to purchase the property.
But it’s not just property buyers and developers who are using bridging finance to fulfill a temporary financial need.
Firms can plug a cash flow issue with bridging finance while others can buy stock or refurbish their premises or even pay a tax bill.
Essentially, bridging finance has grown in popularity because it can be used for a range of purposes with most lenders being open to any potential use for them. The only restriction is the value of the security property being used.
This means that the lender may loan up to 70% (LTV) of the property’s value and this value will be decided by an independent surveyor.
For those interested in a bridging loan
The next big question for those interested in a bridging loan is how much they can borrow. This depends entirely on the lender’s criteria and also on the circumstances of the borrower.
Most lenders will have a minimum loan amount, some may offer as little as £10,000, and all will have a maximum amount, for some it will be £2 million, as it is for the Bridge Crowd, while others will lend more.
If the potential benefits of bridging finance attract you as a borrower then you need to appreciate that this type of loan tends to be for a short period. Usually, the maximum term for most lenders will be 12 months though some will arrange a loan for up to 24 months.
One reason why these loans have a shorter timeframe is that they are only generally needed for a short period of time but they also tend to be dearer than a traditional loan which means the borrower should pay them back as soon as possible.
In addition, bridging finance attracts other fees and administration charges that need to be appreciated before a borrower applies for this type of finance and most lenders have a calculator on their website to help with this process.
The bridging loans are also structured so the borrower can either pay interest every month or simply have this amount ‘rolled-up’ to be repaid at the end of the loan’s term.
The borrower’s exit strategy
This also raises the question of the borrower’s exit strategy so the lender will need to know whether the bridging loan will be ‘open’ or ‘closed’.
This means that with a closed bridging loan, the borrower knows when they will have the money to repay what they owe whereas with an open bridging loan they don’t have that information.
All bridging loans will need to be repaid by the loan’s term or the borrower risks paying extra charges and being moved onto a higher rate of interest.
To sum up, bridging loans are becoming popular because they are recognised by businesses and individuals for providing access to large amounts of money quickly and on flexible terms.
This means a borrower can plug a cash flow issue or take advantage of a financial opportunity they may miss out on otherwise.
If you would like to know more about bridging loans UK and whether one would be suitable for your needs, then speak with a team of bridging finance experts at the Bridge Crowd.