Bridging loans explained
Bridging loans are short-term finance, often used by landlords to buy properties at auction because they are much faster and easier to arrange than buy-to-let mortgages.
You can take out a bridging loan for any period so if you only need a loan for a day, that’s fine, but you could also borrow the money for up to three years or more.
Usually you can borrow up to 75% of a property’s value, but you could secure the loan against more than one property you own to increase the amount you can borrow.
Interest rates for bridging loans are high – typically from 12% to 18% – which is why they are only a good idea for very short term lending. Landlords and other property investors usually only take out bridging loans as an interim measure between buying a property and arranging a mortgage – the clue is in the name ‘bridging’ loan!
Sometimes bridging loans are used by property developers to buy properties they intend to ‘flip’ – buy, renovate and sell within a very short period of time.
Occasionally they are used by landlords to secure properties while they apply for mortgages. Sometimes a property will require some work before it qualifies for a buy-to-let mortgage, you might need to install a kitchen or bathroom or underpin it, for example. In this case, a bridging loan would allow you to buy it and carry out the work before mortgaging it.
However, if you go down this route, you must make sure that you will be able to raise a mortgage on the property before taking out a bridging loan, otherwise you could be stuck paying a crippling high interest rate.
Benefits of bridging loans:
- They can be arranged very quickly – sometimes within 24 hours.
- They can be secured against more than one property, meaning you can borrow more and decrease the LTV to get a lower interest rate. The lowest rates are for LTVs of 50% or less.
- You can take out a bridging loan for as little as a day or for several years, so they are much more flexible than mortgages.
- You don’t usually need to make any repayments until you surrender the loan, at which point the interest is added to the amount you borrowed and you repay the whole lot in one go.
- You can get bridging loans for properties that might not qualify for a mortgage.
- It’s easier to get a bridging loan than a mortgage if you have a poor credit history.
Reasons not to take out a bridging loan:
- Interest rates are very high – you could end up paying as much as 18% APR
- You usually have arrangement fees on top, which are expensive.
- You might not be able to sell the property or re-mortgage is as fast as you intended, leaving you stuck with the bridging loan at a high interest rate.
- Just because you are able to get a bridging loan on a property, it doesn’t mean you will be able to get a mortgage.
Anyone thinking of taking out a mortgage or a bridging loan should ideally seek independent financial advice first.