When it comes to loans, there are many different types you can get, from home equity loans to pay day loans, mortgages to car payments. You may have even seen the term bridging loan before and wondered to yourself what they are? Bridging loans however are very different to most types, especially standard bank loans.
Bridging loans work in a unique way; rather than having monthly repayments as with other loans, they are given over a term of 1-18 months, then all repayment is expected in full at the end of the term. They are designed to be used as a stopgap for liquid cash, while you are finalising a sale of a property, refinancing to longer-term debt or otherwise need to gain access to liquid assets.
When it comes to applying for them, it is usually as simple as having something to back against the loan, such as land or a property – you can even use the one that you are looking to sell! When applying through a bank, especially one that you already have a banking history with, then the process can be done in as little as 5 -14 days!
They are very handy in a few different circumstances:
When you’re buying a property quickly: If you’ve bought a property through an auction, or have come across a great value-for-money opportunity that’s likely to be snapped up, you can use a bridging loan as a stop-gap to put down the money for the place very quickly and have the extra time given to find the cash for the loan.
Preventing a repossession: If you’re in the circumstance of needing money in the short-term while you’re waiting for other sources of funding to come through, then a bridging loan can help you gain the cash to prevent your home from being repossessed. In this case it’s always important to be sure you will have the full funding secured by the end of the loan’s term or you will be in even worse trouble!
Buying an uninhabitable home: If you have found a great deal on a fixer-upper, or want to buy a property to flip it, then a bridging loan can be a great way to do this. Whereas most loans backed against property would required the property to be habitable, a bridging loan can be secured against property that isn’t habitable, meaning it can be used to buy the new home. This is a great way to buy your first home without paying as much as most will!
Paying for property renovation or restoration: On the flip side of that, what if you’re a property developer that wants to buy run-down houses, redevelop them and then sell them on? Bridging loans seem almost perfectly designed for this! You can secure the bridging loan against the new property, use the loan to pay for the redevelopment and renovation, sell the house on, then pay back the loan from the home sale! Of course this can be a fairly risky game to play as it relies on building work not being delayed too much and that the house will sell for at least enough to cover the loan and the time spent on the home, but if you know what you’re doing, they’re a fantastic tool!
Hopefully this post has answered your question, and if you want to know anything else about bridging loans, please read through some of our other posts!