We have all come across different types of loans, from payday loans to student loans, fixed-rate mortgages to personal loans; and we all have some idea of what they are. But there is one type of loan – a bridging loan – that many people haven’t heard of, and even those who have heard of them don’t fully understand what they are. To address this confusion, below is a brief guide on bridging loans. Who knows, it could turn out to be a suitable option for your situation.
So, what is a bridging loan?
Bridging loans tend to be a form of short-term business loan, which should be viewed as a means of finance designed to get you from one step to the next. That is where the term ‘bridging’ originated.
How are they different to regular-term loans?
The biggest difference is their intention. Unlike normal-term loans, bridging loans were designed to be used for very specific short-term purposes. The biggest thing this effects is the speed in which you receive funds into your account. For a normal-term loan, it typically takes no less than 2 weeks to receive the funds, while a bridging loan can be ready in 24 to 48 hours, sometimes less.
What are bridging loans used for?
There is no definitive answer to this question, but generally speaking, most bridging loans are given to those with a project, usually to do with the property. In this regard, it could be considered as a form of property development finance.
A lot of the time though, getting your hands on a bridging loan depends on the lender, and how he views your plans to spend the money. This means, in theory, it could be used for any opportunity that has an evident exit strategy. An exit strategy is their way of asking how you are going to either a) clear the bridging loan and all accompanying costs or b)transfer it to a more permanent form of loan. For example, this could mean a mortgage.
What is the difference between open and closed bridging loans?
Quite simply, a closed bridging loan has a clear and fixed date for when the line of credit will be stopped. An open bridging loan, however, has no clear exit date attached, thus a lender will only provide for a certain amount of time.
What costs are accompanied by bridging loans?
The most obvious attached cost is the interest rate, which, due to the loan in question being a rather niche and bespoke, tends to be a fair amount higher than other forms of loan. However, most lenders will offer options on this front, allowing the borrower the option to pay a lump sum back at the end of the proposed term instead of monthly payments. This can be an attractive proposition as many borrowers may not have the funds in place to commit to a staggered repayment.
Other fees may include things like an arrangement fee and administration fees, although the amount will be specific to each vendor, and could fluctuate a lot across the market so it is worth doing your research and seeking advice from a professional establishment, such as Enness Bridging Finance, before committing to anything.
Using Bridging Loans Part 1: Commercial Property Development
A lot of the time, bridging loans will be used as the most important form of funding for property developers. For example, it may be that a commercial developer has a site ready to be developed, and has even had permission granted to him by the correct authorities and council bodies. In this case, the developer is building affordable housing. In order for him to spread the costs of the development, so that the company is shouldering the entire cost, the developer may seek a bridging loan. This will give allow him to obtain funding for a short period of time, typically between three and eight months , whereby the development can be undertaken and completed.
How this bridging loans is paid off is simple. The developer has two options. Either he sells the properties he has developed and pays of the loan off in full, or he/she moves the bridging loan onto a more traditional, long-term loan, such as a commercial mortgage.
Using Bridging Loans Part 2: Refurbishment
A bridging loan is a great way to embark on home refurbishments for the simple fact it is easy and efficient to receive loans. Why is the is good? The faster you receive funds the quicker you can begin working.
A typical scenario whereby a bridging loan is used in refurbishment, or indeed renovation, is in the conversion of properties. Sometimes, converting a property will see certain regulations are met allowing them to receive a commercial mortgage, unlike before. In this sense, a bridging loan is an excellent way to complete the work that will grant you a more stable, long-term mortgage.
For a rough guide to costs, use a bridging loan calculator.
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