What is a bridging loan?
Bridging loans are temporary loans that offer fast funding when there's a delay in finalising a transaction. They are often used in property transactions to cover the period between buying a new home and selling the old one. They give you access to money fast at a time where you cannot access your funds. These loans are usually backed by valuable assets like property and need to be paid back within a year, though some can last longer. Once the old property is sold, you use the sale proceeds to pay back the loan.
When are bridging loans useful?
Bridging loans can be used for various reasons:
- Buying before selling: When you find a new property before selling your current home, a bridging loan can provide the funds to help you secure the purchase.
- Fixing a broken chain: They can be used to ensure that transactions proceed even if there are issues or delays in the property chain.
- Auction purchases: Provides quick capital needed to buy properties at auction, where immediate payment is often required.
- Investing in property: Useful for financing buy-to-let investments or other property acquisitions.
- Renovations: Facilitates immediate funding for renovation projects, allowing work to start without delay.
What type of bridging loan helps for a smooth property transition?
The kind of bridging loan you should use to make a smooth property transition depends on your personal and financial situation. There are two main types:
- Open bridge loans
Open bridge loans do not have a set repayment date. They offer greater flexibility but tend to be more costly because of the extended repayment period.
- Closed bridge loans
Closed bridge loans come with a fixed repayment date and are typically less expensive than open bridge loans. They are ideal for borrowers who have a confirmed buyer for their current property and are just waiting for the sale to complete.
Pros and cons of bridging loans
Bridging loans offer several advantages, including flexibility, which is particularly useful for quickly securing properties or managing disruptions in property chains. They provide certainty in transactions, ensuring deals proceed even if other sales in the chain fall through. Additionally, bridging loans grant faster access to funds compared to traditional mortgages and allow for borrowing large amounts due to their secured nature.
However, there are notable drawbacks to consider. Bridging loans can be expensive, with higher interest rates and a variety of fees. The repayment structure can be complex, as interest rates might be either fixed or variable, which can make budgeting more challenging. There is also a risk of repossession; if the loan is not repaid on time, the secured asset could be lost.
To discuss bridging loans and find the most suitable solution for you, call our team at 0345 450 4660.
