JoshIf you’ve never heard of a bridging loan, then chances are you have lots you need to know before you move ahead with getting one or choosing an option that suits you better. Bridging loans are designed to be a bridge between where you are financially and where you hope to be when other types of financing come through. They’re generally used for the time between buying a new home and selling your current home. Bridging Finance allows you to have the money you need to move forward with the purchase, before your property has sold.
Pros of Bridging Loans
You Can Act Quickly
Have you ever found your dream home, but not been able to move forward with a purchase because your current home hadn’t sold. This is the exact circumstance where bridging loans provide the most value, they allow you to use the value of your current home as liquidity against a new short term loan so you can sell your existing property and pay it back. This means if you find your dream home, you won’t have to watch it sell to someone else because you couldn’t get the money together quick enough.
They Can Be Arranged Fast
If you’ve ever waited on a traditional mortgage, you know that this process can often take weeks or months to come through. Bridging loans come through fast because they are used for those short term situations where you need some money quickly to move forward with a project. Alongside the speed of arranging the loan, they tend to focus more on the buyer having a solid exit strategy, which is having the means to pay back the loan when their property sells. You’ll find bridging loans have looser lending terms than other types of loans which can make them a great option if your credit score is less than desirable.
Payment “Deferred” And in Full
One of the best parts about a bridging loan is that the payment is usually deferred, which means that the money is left until the end of the loan to be paid back. This means you hopefully won’t have to make any additional payments while you’re waiting for your property to sell and instead all the payment amount and interest will be due together.
Cons of Bridging Loans
Higher Interest Rate
Due to the type of loan, being shorter term and relatively higher risk, the interest rates are higher than standard loans. Generally you’ll see around a 0.5-1% increase in loan price, but it can vary more depending on the specific bridging loan.
Collateral Risks
Due to the fact that bridging loans are generally based around selling a property, you’re going to need to have something of value to use as collateral.
Additional Fees
Due to the short term nature and high risk aspect of bridging loans, there are often a host of fees that get added onto the loan balance. Be sure to ask in advance to see a full picture of what these fees might be.
Bridging loans can be a great way to ‘tide you over’ until you have your proper, long term financing or until your property sells. I hope these pros and cons help make it easier to understand what the benefits are to a bridging loan and the likely consequences you might experience.