This is the second part in the guide to help people and business understand what UK bridging loans are and what purposes they can be used for.
That’s because there is some confusion among borrowers about what they can use their bridging loan finance for and the uses are wide and varied.
Most borrowers of bridging finance tend to use them for the purchase and then the renovating of a property which can be residential and commercial buildings.
There’s also the opportunity for bridging finance to pay for a property development or a developer may simply be wanting to add a bathroom or a room to a property they own before selling it on.
Essentially, a borrower can use bridging finance for many short-term commercial reasons but it’s important that they have an exit strategy in place as this will depend on the borrower having an exit strategy in place.
So what is an ‘exit’ for a bridging loan and why is it important?
When bridging loan lenders say they need an ‘exit’ they are actually asking how the borrower is looking to repay the loan which makes it an important question.
The borrower needs to understand how they will repay the loan in full, along with the interest, and over how long the loan will be. If they know these factors then this is known as a closed bridging loan.
For those bridging finance borrowers who do not know how long they will be needing the loan for then this is known as an open bridging loan.
As an example, a closed bridging loan may be approved if a property sale that will be used to repay the loan in full is already in the process of being sold when the loan is taken out.
Bridging loan interest rates UK
It should also the appreciated that bridging loan finance is something of a specialist form of financing and usually for specific short-term purposes which means that the bridging loan interest rates UK being charged can be higher than those be charged for a traditional term loan.
There are also a variety of ways that a borrower can repay their bridging loan, for instance some may decide to pay monthly or they may opt to have their interest payments ‘rolled up’ so they repay a lump sum at the term’s end.
There are a number of attractions for using the rolled up solution which will appeal particularly to those borrowers who do not have enough funding during the early stages of their receiving the bridging loan.