If you have been involved in UK property investment for a while you may have considered using a bridging loan for your projects. Here we will explain what a bridging loan really is and the advantages and disadvantages that it offers.
What is a Bridging Loan?
The main difference between a mortgage and a bridging loan is the length of the loan term. A bridging loan is a short term financing option. Usually bridging loans have a term from one month to eighteen months compared to many years with a traditional mortgage.
You would normally consider a bridging loan if you could not acquire a property with a mortgage. There are two types of bridging loan available today for you to consider as a financing option.
The Closed Bridging Loan
When there is a guaranteed exit in place you can use a closed bridging loan. Long term finance will have been agreed in this case. Closed bridging loans are not that common because of the amount of property deals that fall through.
The Open Bridging Loan
If there is no definitive exit date then an open bridging loan can be used. In this scenario the investor will not have secured long term finance. This kind of bridging loan is a popular choice among property investors.
Advantages of a Bridging Loan
It is normally quick to arrange for a bridging loan. There is no government regulation which means that the approval process tends to be a lot faster than with other loans. Speed is often essential with property deals.
There are options when it comes to repayments. You can add your monthly interest payments to the final payment if you want to. When you do this there are no repayments over the term of the loan. This is convenient when flipping properties.
You can use a bridging loan for all kinds of property projects. A property does not have to be inhabitable as it does with a mortgage. A bridging loan can also be a secondary charge on a property after a mortgage.
Bridging loan lenders tend to be less concerned about credit ratings than mortgage lenders do. Also it is usual that there are no early exit fees with bridging loans. Some lenders will be prepared to offer a 100% bridging loan for property purchases.
Disadvantages of Bridging Loans
Normally a bridging loan carries a higher rate of interest than a traditional mortgage does. APR rates of between 12% and 20% are not uncommon. Fees are usually higher with bridging loans too. There is usually an arrangement fee of around 1.5% and there can be valuation fees, legal fees and broker fees as well.
Although no government regulation makes the bridging loan process faster as a borrower you have no recourse to any protection with the Financial Conduct Authority (FCA) as you do with a mortgage.
The other major disadvantage of a bridging loan is that rates and terms can vary significantly between lenders. With a mortgage you know that the rates and terms are going to be similar between lenders. Also it is not easy for you to get the lowest rates and you may have to use a broker for your bridging loan.