With bridge funding growing quickly in popularity, many people are wanting to know what the pros and cons of this type of finance are.
Essentially, a bridging loan is a short-term loan that a borrower can take out so they can, for instance, buy a new property before they have sold their current home.
They are not just used for this purpose; bridging loans are now used for a wide variety of purposes and include buying property at auction or to help pay for refurbishing a rundown property that a mortgage lender will not lend on.
For anyone interested in a bridging loan, they need to appreciate that there are two distinct types of this finance available.
The first is what is known as a ‘closed bridge’ which is a bridging loan that has a guaranteed exit in place. For instance, someone using a bridging loan to buy a property may be waiting for a mortgage to be agreed and for the money to land in their account – this has an exit place which makes the loan an attractive proposition for a bridging lender.
Bridging loan that is an ‘open bridge’
The alternative is a bridging loan that is an ‘open bridge’ and these are loans that do not have a definite exit date when the application is made because there’s no long-term replacement finance being arranged.
These open bridging loans run for a specific time, usually six or nine months though some bridging lenders will forward a loan for up to two years.
In addition, an open bridging loan also offers the facility to ‘roll-up’ the interest payments until the time comes to repay the whole loan rather than paying the interest in instalments.
So the pros for arranging a bridging loan is that they are flexible and can be used for a wide range of needs and the payment levels can be deferred until the repayment date. They are also quick to arrange.
What to consider for a bridge loan
The other side of what to consider for a bridge loan are the fees for arranging one, this can be a percentage of the agreed amount, and the interest rates are higher than mainstream lenders.
Despite this, the flexibility and willingness of bridging loan lenders to loan money on a wide variety of purposes means they are an increasingly attractive form of finance to a growing number of customers who range from home buyers, to property developers and business owners.
However, one of the big positives for anybody interested in bridge funding is that they can be arranged quickly – certainly more so than a bank – and can be arranged in just a few days, or, in some cases, a few hours.