The main thing to consider before getting a bridging loan is whether or not you have an exit strategy, otherwise you could be at risk of penalties, increased rates and risk of repossession.
But when used correctly, and with a solid exit strategy, bridging loans can be great financial tools, especially in a number of situations.
Maybe you’re trying to buy a new home before selling your current one, or you’ve won a property at auction and need funds quickly. Whatever the reason, bridging loans can be helpful tools, but before diving in, it’s important to weigh your options, understand the costs involved, and make sure you’ve got a solid plan for repayment.
1. Understanding What A Bridging Loan Is
Bridging loans are quick, short-term loans normally used to cover the gap between two financial transactions. They’re regularly used in property deals, but they can also be used for other purposes, like financing a business while waiting for longer-term funding to come through.
These loans can be arranged quickly—sometimes within a week—but they usually come with higher interest rates and fees compared to traditional loans. That’s the price you pay for speed and flexibility!
2. Assess Your Need: Is A Bridging Loan The Right Choice?
Here are some alternatives to consider:
- Personal Loans: If the amount you need is relatively small, a personal loan might be a simpler and cheaper option.
- Remortgaging: If you have enough equity in your current property, you could remortgage to release funds instead of taking out a separate loan.
- Secured Loans: These loans are also secured against your property but can offer longer terms and potentially lower interest rates. However, they may involve longer processing times.
If none of these seem right for your situation, then it may be the case that a bridging loan is right for you!
3. Calculate The Costs – Can You Afford It?
Here’s what you need to factor in:
- Interest Rates: These are normally higher than standard loans, and because bridging loans are short-term, the interest is often charged daily. Rates can be fixed or variable, so make sure you know what you’re signing up for.
- Fees: On top of interest, you’ll likely pay arrangement fees, legal fees, valuation fees, and potentially some administration fees too. All of these can add up, so it’s important to budget for them.
4. Do You Need Loan Term Flexibility?
Bridging loans are typically short-term, but the length of the term can vary.
While some loans are available for up to 24 months, many are capped at 12 months, particularly regulated loans. Make sure that the loan terms align with your exit strategy. If you’re planning to sell a property in a year but the loan is only 10 months, it might land you in some hot water.
If there’s any uncertainty about how long you’ll need the loan, look for an unregulated bridging loan lender that offers flexible terms or the option to extend the loan if needed.
5. Consider The Type Of Bridging Loan You Need
- Open vs. Closed Bridging Loans: Open bridging loans don’t have a fixed repayment date, which can be useful if you’re unsure when your funds will become available. However, they might come with higher interest rates. It depends how risk averse you want to be. Closed bridging loans have a set repayment date and often lower rates, but they require you to be more certain about your exit strategy.
- First vs. Second Charge Loans: First charge loans are secured against a property without a mortgage, making them less risky and often cheaper. Second charge loans are secured on a property with an existing mortgage, which might mean you need to get permission from the mortgage lender and could carry higher costs.
6. Plan Your Repayment Strategy
Maybe the most important part of taking out a bridging loan is having a clear and realistic exit strategy—this is how you’ll repay the loan at the end of its term. Some repayment plans include:
- Selling The Property: If you’re using the loan to buy a new property before selling your current one, the money from the sale will pay off the bridging loan.
- Refinancing: If you are using the loan to cover short-term costs, you might plan to switch to a longer-term mortgage or another type of finance once the bridging loan term ends.
- Business Income: If the loan is for business purposes, the revenue generated from the business could be used to repay the loan.
It’s important to be realistic about your ability to pay off the loan and execute your exit strategy. If selling a property is your plan, look at how quickly properties are selling in your area. If refinancing is your strategy, make sure you’re eligible for a mortgage (and apply for one!) before the bridging loan term ends.
7. Do You Have A Plan For Unexpected Delays?
Property transactions, especially those involving sales, can be unpredictable.
The market can change quickly, legal issues can arise or unforeseen circumstances can delay a sale. It’s important to have a plan B in case your original plan takes longer than expected. This might mean setting aside extra funds for interest payments or having a backup refinancing option.
8. Do You Need Expert Advice?
The world of bridging loans can be complicated, especially with so many lenders offering different terms.
A bridging loan broker can be incredibly useful in this process. They can help you understand your options, negotiate better rates, and guide you through the application process. Plus, they can help you avoid lenders that might not be a good fit for your specific situation.
10. Final Considerations
Bridging loans can be a great financial tool when used correctly, but it’s worth considering whether it’s right for you.
Take the time to think about your needs and make sure you fully understand the costs and risks involved.
And remember, having a solid exit strategy is very important. If you’re unsure, speak to a financial adviser or a bridging loan specialist to help you make the best decision for your situation.
For bridging loans against commercial and residential property assets, visit Blue Square Capital to enquire today.
