Here, we look at how to decide whether a bridging loan is right for you and the pros and cons of getting one. Let’s get into it.
What Is A Bridging Loan?
A bridging loan is a short-term loan designed to ‘bridge the gap’ between financial transactions. For example, it can be used if an investor needs quick capital to secure a property at auction, with plans to pay it off later.
With bridging loans, investors or property buyers tend to accept higher interest rates in exchange for quicker processing times – allowing them to secure a deal faster. Because of these higher interest rates, bridging loans are normally used when other financing options, like mortgages, aren’t feasible within the timeframe.
Do I Qualify For A Bridging Loan?
To qualify for a bridging loan, you’ll generally need to meet the following requirements:
1. Age
To get a loan in the UK, you must be at least 18 years of age, though some companies may have a higher age limit.
If you are a UK resident, getting a bridging loan will likely be easier, though there are options for foreign investors too.
2. Assets
Bridging loans aren’t just given to anyone, they’re normally secured against an asset you own.
Typically, this is a property that an owner must have more than 25% equity in. The reason for this is that the bridging lender wants to know that if you do not pay the loan back in time, they are still able to claim payment elsewhere.
If you don’t have any assets to use as collateral, it’s unlikely the loan will be approved without a very well thought through exit strategy.
3. Your Exit Strategy
Before approving the loan, any lender will want to know exactly how you want to repay it. This could mean selling a property, selling another asset or refinancing through another type of loan like a mortgage.
In any case, it’s important to ensure that you have a solid repayment plan to avoid any hefty fines or fees. This exit strategy is likely to be evaluated during the application process, so ensure you have it planned out well in advance.
4. Credit History
Whilst not all lenders look at credit history, it’s worth ensuring your score isn’t too low. This tends to be a universal signal that you are a responsible borrower, so try and boost your credit score before applying.
See our guide around eligibility criteria for a bridging loan here.
When Might You Need A Bridging Loan?
- Buying A Property Before Selling Your Current Home: If you’ve found your dream home but haven’t sold your current property, a bridging loan can provide the funds needed to complete the purchase.
- Purchasing at Auction: Auctions often require quick completion, sometimes within 28 days. A bridging loan can help you secure the property while you arrange alternative long-term financing like a traditional mortgage.
- Renovations and Refurbishments: If you’re buying a property that requires a lot of work before it can be sold or rented, a bridging loan can cover the cost of renovations.
- Releasing Equity: Whether it’s to pay a tax bill, settle a divorce, or cover care home fees, bridging loans can provide quick access to funds when you need them quickly.
Is A Bridging Loan Right For You?
If you need a large sum of money quickly and have a solid strategy to pay it back, a bridging loan can be an incredibly useful tool. However, if you are worried about the reliability of your exit strategy and may not be able to pay it back, then it probably isn’t right.
Ultimately, if you need a quick bridging loan, it’s worth speaking to a professional advisor to ensure you’re making a financially responsible decision.
What Are The Alternatives To Bridging Loans?
Before committing to a bridging loan, it’s worth considering alternative options that may be better suited to your situation, some of these include:
- Remortgaging: You could remortgage any properties you own to release equity, allowing you to access the funds you need without the pressures of a bridging loan.
- Personal Loans: For smaller amounts, a personal loan might be better and would avoid putting your property at risk.
Is A Bridging Loan Right For You? The Pros and Cons
Pros
- Speed: Bridging loans can be arranged and funded much faster than traditional mortgages, often within a few days.
- Flexibility: With options for regulated or unregulated loans and the ability to negotiate interest rates, bridging loans can be tailored to your specific needs.
- Large Loan Amounts: Because they’re secured against a high-value asset like a property, you can usually borrow larger amounts than personal loans, sometimes up to 80% of the property’s value.
- No Early Repayment Charges: If you can repay the loan early, you won’t be penalised, potentially saving on interest costs.
Cons
- High Interest: The combination of high interest rates and fees makes bridging loans a more expensive option than other loans.
- Short Term: The loan needs to be repaid quickly, usually within 12 months, which can be difficult if there are delays in selling the property or arranging alternative financing.
Should You Choose A Bridging Loan?
Bridging loans offer a flexible and fast solution for investors and can be useful for securing larger sums than other quick loans.
However, they aren’t suitable for everyone. Start by considering your options, understanding the risks and planning your exit strategy. Once you’ve done that, you can make an informed decision about whether a bridging loan is the right move for you.
If you’re unsure about whether a bridging loan is right for you, get in touch with Blue Square today.
