A bridging loan is typically a loan which is required for a short period of time and is secured against property or land.
Short term bridging loans can be used for virtually any purpose such as business ventures, property purchase, property development, tax payments etc and can be on an interest only basis or the interest can be rolled up into the loan so there are no payments.
It is important that you have a plan to pay the loan off as lenders expect the loan to last, generally, no more than 18 months – often the loans are taken for only 2 or 3 months. If your loan is regulated by the FCA the term should not last longer than 12 months. Typically the loan is paid off by property sale, a remortgage, inheritance or a business venture completing.
Variations of bridging loans
Bridging loans tend to be for personal use or for business purposes. Broadly there are different regulations which will apply to each regulatory arena – read more in regulatory protection for bridging borrowers.
Once you get in to the details of a particular bridging loan the main product variations are as follows.
- Interest rate – the rate you will pay on the amount borrowed during the agreed term
- Default rate – the rate you will pay if you exceed the agreed term
- Lender fee – a charge which may be made by a lender when your loan completes
- Exit fee – a charge which may apply when you loan ends or you pay it off early
- Roll up calculation – If you choose not to make payments on the loan they will be added to the loan and included in the gross amount you borrow – different lenders have different methods of apply interest to this amount
- Part payments – each lender has it’s own policy on how you can make additional payments during the term.
Your broker will provide you with this information relating to any lenders offer and explain it to you.
If you can prove your income and can afford the additional payments you may also want to consider a secured second charge loan or a remortgage even if the loan is for business purposes.
If you have commercial property or a limited company there may also be more cost effective options available with commercial or business loans.
If speed is of the essence, you should expect the more mainstream lenders to ask more questions and require you to jump through more hoops. This could mean a slower process which ultimately could result in you missing out on the purchase or outcome you were hoping for. There are many factors which need to be considered and discussed with a bridging expert to help you decide.