Last updated: 03/09/2020 | Estimated Reading Time: 3 minutes
Short term bridging loans are popular among homebuyers who are experiencing delays in the chain of buying and selling.
Read this short guide to find out exactly what they are, how they work, and when they become useful.
In This Guide:
What are bridging loans?
Bridging loans are short term borrowing options used mainly in property transactions. They are designed to give the borrower access to cash quickly in order to bridge the gap between the due date of a certain debt and the arrival of the capital necessary to pay it off.
Who should get a bridging loan?
A typical use for a bridging loan would be to help the borrower generate the cash necessary to purchase their new home before the sale of their current home has gone through. In this instance, they bridge any gap created by potential delays in the chain when selling and buying a home.
Another instance when a bridging loan would help is if you plan to buy a new home, and need to move out soon, but you have a large outstanding balance on your current mortgage.
You can use a bridging loan to borrow the cash necessary to pay off the existing mortgage, allowing to take out a new mortgage to purchase the new property, or to simply cover your finances until you can find a buyer for your current home.
Are they expensive?
As with any other kind of short term credit, like payday loans, bridging loans do tend to be rather expensive.
Interest rates, or APR, will be high, reflecting the short term nature of the loan and the need to pay it off quickly. As such, you should only take out a bridging loan when you are confident of the imminent arrival of the capital needed to pay it off or to make the relevant purchase in the first place.
Beyond the interest, bridging loans tend to come with fairly large administrative fees when you set them up, as well as large exit fees.
A 1.5% fee for both could add rather a lot. If your loan is for £180,000, this would mean an extra £3,600 to the overall cost, and that's before you pay interest.
If you need to loan to help with the purchase of a new home while you still own your current one, then you might want to consider a secured homeowner loan - this is particularly a good option if you own a further home that you can back the loan against.
Other options would be to check if there is any equity in your current home that you could release using an equity release loan.
Other short-term borrowing options include payday loans, but you are very unlikely to be able to borrow anywhere close to the same amount using a payday loan, and with incredibly high fees and the generally questionable business practises of many payday loan companies, this is unlikely to be a reasonable alternative to a bridging loan.