Bridging loans are a great way to get hold of liquid finance to secure an asset from an auction, pay towards renovating a home before sale in the case of flipping a property, or even as a way of paying for a renovation while you’re waiting for long-term finances. However, bridging loans can come with a few drawbacks that you should always keep in mind before securing one!
They are only short term loans – Bridging loans only come in the short term variety, with 18 months being a very occasional maximum length, the typical term is 6-12 months. This means that you will need to be sure that you will get hold of the finances to pay the loan off at the end of its term. Paying off the monthly interest can be a way to help you ensure you can do it, but if you can’t pay off the loan at the end, you’ll be in very serious trouble. It’s very important that you don’t use bridging loans as a way to consolidate debt or as a risky venture to buy an item outside of your means, like a car or boat. They should only be used under very specific circumstances, usually with the guidance of a financial adviser.
Fees – Unfortunately bridging loans suffer a great deal from bank fees. As they are so popular, banks usually charge a premium for them, normally in the range of 1.5% of the loan, which is taken out of the initial sum. You will then usually have extra fees placed on top such as valuation on the property you’re backing against and legal fees. If you go through a broker, then you’ll also have to pay the brokerage fees as well! Whenever you are shopping for a bridging loan, make sure that you check out the payable fees on the loan while also checking out the interest rate. While a loan might have a fantastic interest rate, it could be used to hook you in and you might end up paying more in the long run just from the fees alone!
Interest rates – While bridging loans interest rates are becoming much more competitive, as they are only short-term loans, they are still more expensive than conventional loans and mortgages in some cases! Of course they are used in unique circumstances where a loan or mortgage might not be suitable, so try to match it to your current situation! This is why we advise you to never take out a bridging loan to consolidate debt; it’s usually much more costly due to the increased interest.
No flexibility on payment difficulties – Due to the unique nature of bridging loans, banks have zero sympathy if you’re unable to pay back your loan at it’s end. They don’t allow payment plans or late payment of the loan and will charge compound interest for every day that it isn’t paid off past its due date. This means that the cost of the loan can very quickly spiral out of control if you don’t have an exit strategy in place. They are very harmful to your credit profile if you default on the loan as well.
While bridging loans can be very useful, as described in our Pros of Bridging Loans blog post; it is always worth keeping the cons in mind as well! Make sure that you’re getting the best deal you can by looking at fees as well as interest rates, have a clear method of payment and exit laid out and set up and know the exact purpose you’re using it for. If ever in doubt, speak to a financial advisor.