Guide to Bridging Loans & Bridging Finance

Posted by John Yates

Bridging loans are flexible, short-term loans that are typically secured against property, with the borrower consenting to pay back the loan and its accrued interested by a certain set date. The temporary funding is meant to provide a financial bridge for the borrower until money becomes available to pay the loan back. If you are considering applying for a bridging loan, utilise the following guide to better understand how it works and some potential benefits.

Guide to Bridging Loans

Guide to Bridging Loans


How Do Bridging Loans Work?

Bridging loans are most commonly used in order to supply funding for purchasing a new property, while the borrower is waiting for their current property to sell. However, it is becoming an increasingly popular choice for individuals with limited financial resources, particularly since the start of the financial crisis. Bridges can assist borrowers in a variety of situations because they are not offered on the basis of the borrower’s ability to maintain routine payments. They can be employed for any purpose, as long as the lender accepts the offered security and exit strategy. All bridging loan lenders will need to have a feasible exit strategy for repayment before they grant any funding.

The term for repayment can be adjusted to satisfy individual needs, but the majority of bridging loans have a term less than a year. Although these loans are notorious for being more expensive than standard loans, the financial crisis has caused the prices to drop dramatically to less than 1.5 percent a month. After the loan has run its course, the borrower has the often to pay the loan off, sell the property, refinance through another traditional loan provider, or remortgage.

Who is Ideal for Bridging Loans?

Anyone that is knowledgeable about the loan, understands the timeframe, and has a viable plan for repayment can borrow money through a bridging loan. Traditionally, bridges have been used by prospective residential or commercial property purchasers. The funds could also be used for individuals that are seeking to buy a property, renovate it, and then put it back on the market for sale within the loan’s term. In addition, individuals in financial strife can use the loan to avoid repossession of their home. Basically, bridging is ideal for all people that need some extra money and breathing room to arrange longer term finance or finalize the sale of a property. Since the loans can range in value from £50,000 to £50m, there is endless possibility.

Advantages vs. Disadvantages

Bridging loans can be very beneficial for providing a flexible form of finances for short-term opportunities, which enables fast funding and a temporary cash injection. Some bridges become available within as little as 48 short hours after acceptance. The loans have increased in popularity, so that individuals can get finance through this method when they are rejected by other more conventional lenders. Although the company will peruse over the borrower’s financial situation, there will not likely be any strict emphasis placed upon credit scores or other criteria for approval.

On the other hand, bridging loans come with higher interest rates than many other kinds of loans available. If the repayment exit plan is not properly executed, the individual will face some hefty penalty interest rates that can be an extreme form of financial punishment. For instance, an interest rate might be as low as 0.75 percent, but the penalty interest rate soars to 3 percent. Prospective applicants must realize these costs when forming a practical exit strategy, so that the funds or refinancing are settled before the agreed repayment period. Borrowers should only take out a bridging loan when there is a solid exit plan to repay it before the designated term is up to avoid these punitive charges.

There are many alternatives to bridging loans that potential borrowers should consider, such as secured loans, conventional mortgages, asset financing, and commercial lending. However, bridges offer a unique opportunity to access sizable funds within a few hours or days. When shopping for a loan, keep in mind that there is no other market product offered that comes with these special benefits of bridging loans.

Bridging Loans & Bridging Finance: Resource

Bridging Loans – Businesses Relying on Bridging Finance

The Bridging Loans market will have financed more then £2bn in short term financing by the end of 2013. Annaul lending has grown by 9% in the 1st quarter and by 39% the 2nd quater of 2012.

Bridging lenders are increasingly willing to lend to Businesses for cash flow, stock. The Buy-to-Let market has also turned to bridging loans to complete purchases. We also recently reported that, Strong evidence now suggests that the government-created Business Bank is not keeping up with alternative forms of bridging finance for small businesses.


Bridging Loans – 6 Month Bridging Loans

In response to these dire economic times, businesses are beginning to increasingly use bridging loans to relocate to new premises, or for short term cash flow that they need in order to keep their business afloat. New policies developed by banking institutions have prevented people from re-mortgaging, hence getting a bridging loan, until they have owned the property for six months or more. This has lead to higher costs due to extending the term of the expensive short term loans.


Bridging Finance on Buy to Let

A client approached us who had an outstanding mortgage of £200,000 on a villa in Spain, the villa was worth £210,000. The bank were recalling its debts due to the weakened Spanish economy and offered the client a short settlement opportunity to pay £160,000 to clear the mortgage on the villa. This is a classic example of when bridging finance should be used. The lend was unusual, but time critical.


Bridging Loans & Short Term Bridging Finance – Midlands, UK

Bridging loans are offered for various financial requirements for example time sensitive deals such as auction purchases, money for business cash flow and light property refurbishment, the list is endless. These are based on 1st and/or 2nd charge loans and can be arranged in a very short period of time.


Business Bridging Loans Can Help with Cash Flow

In the current world market, bridging loans have become a very popular option for the small business seeking to free capital in order to advance the company. Used well, this type of loan is very effective and efficient and allows a business the freedom to grow in almost any economic conditions and without great sacrifice. Knowing when a bridging loan is the right option, however, is difficult.


John Yates Managing Director of Greenfield Capital has 12 years commercial and residential property funding experience. John was responsible for managing the secured lending department of a high street bank and brings a wealth of experience in property underwriting.