Securing borrowing against your property is a big decision and it’s crucial that you choose the most suitable product for your needs. Bridging loans are an excellent tool to have in your locker, although it’s important that they’re only used where appropriate.
What is a bridging loan?
Bridging loans are short-term loans, which are secured against property. They are growing in popularity in recent years, although the history of bridging loans hasn’t always been quite so glamourous.
They were a largely niche product historically, although with bridging finance costs reducing in recent years and rising standards in the industry, the tide has turned.
These loans are usually arranged for between 1-18 months, with the interest often being added to the loan, meaning there are no monthly payments to make.
When bridging loans are repaid early, there aren’t usually any exit penalties to pay, making them a cost-effective borrowing tool for short-term requirements. That said, bridging loan interest rates are higher than those associated with some of the alternatives that we will be covering later in this article.
As with any borrowing, it’s important that you consider the total costs of borrowing before committing.
When would a bridging loan be appropriate?
There are a lot of uses for bridging loans, including completing a property purchase quickly, finance for property refurbishments, preventing repossession and buying a property before selling your existing one.
They are used by both property investors and homeowners to fund urgent, unusual or profitable financial transactions. Bridging loans for property developers can generate significant profits by allowing the developer to take on larger projects. They’re a relatively bespoke product, which is designed to be flexible, so the reality is that there is no ‘one size fits all’ reason for taking out a bridging loan.
If an application makes sense, it can usually be funded.
What are the alternatives to bridging loans?
Comparing bridging loans to mortgages highlights a number of clear differences between the two products. That said, there are times where a decision must be made between the two.
Mortgages are usually more appropriate for longer term needs than bridging loans. Mortgages tend to come with lower interest rates, however there are often early repayment charges to consider. For a detailed breakdown, read our guide to bridging loans vs mortgages.
Secured loans are used to release equity from a property on a second charge basis, this leaves them facing some crossover with second charge bridging loans. Again, secured loan rates are usually lower than those offered by bridging lenders, but they do usually come with penalties early repayment.
Secured loan lenders don’t usually lend where the loan will be repaid within a matter of months. That can lead to difficulty in securing another loan in the future should a pattern of very early repayment emerge on your credit file.
Both products can be used to fund property development projects, but there are subtle differences between the two. Property development finance is usually used to fund ground up development projects, whereas property refurbishment finance is generally the better product for conversions and refurbishments. For more information, read our guide to bridging loans vs development finance.
Unlike bridging loans, commercial mortgages are a longer-term product, usually available for up to 25 years. Commercial mortgage rates are also usually lower than the equivalent bridging loan rates. That said, they are less flexible and do tend to come with early repayment charges when repaid early, meaning there are pros and cons to each product.
Using savings or approaching family for a loan
Borrowing from family can be a great alternative to taking out a bridging loan, although it does come with certain challenges. Where funds may be available from a family member, you must consider the cost saved by borrowing from family, compared with any potential repercussions should you struggle to repay them.
When buying property as an investment, for example using the build, refurbish and rent model, you may look to borrow from a lender, or use the funds of a private investor.
How these two options compare depend on both the deal you’re offered by a bridging loan provider and the one offered by the investor.
Usually, a bridging loan lender will be more predictable in their approach than an investor. Individual investors don’t usually work to set criteria and may not be regulated, meaning you could be vulnerable to a change of heart on their side.
Negotiating with an existing lender
If you’ve run into difficulty with your current mortgage provider, you may be asked to redeem your loan in full, or face the threat of repossession.
A bridging loan can be used to repay your mortgage, with the interest being rolled into the loan, leaving you with no monthly repayments to make.
This is usually only a good idea as a temporary arrangement while waiting to sell the property or tidy up your finances before taking out a new mortgage.
The costs of bridging loans are higher than those associated with a mortgage. Even if you’re not paying any monthly payments, you will still be accumulating interest, which must be paid off.
Fast house buying companies
Fast house buying companies are often considered as an alternative to bridging loans in that they can be used to release equity from a property quickly.
When releasing cash using bridging finance, you retain ownership of the property, whereas quick house sale companies are purchasing the asset from you.
Retaining ownership gives you more options going forward, you could refurbish the property to add value, let it to generate an income, or live in it.
When comparing bridging finance to these companies when you plan to sell the property, the cost of bridging is usually lower. This is because these companies usually offer no more than 75% of your property value, meaning they make a big profit on the property by paying you less. Bridging loan costs usually come to less than the difference between the value and the price paid by fast house buying companies.