Finance Q&A's
Bridging Loans
Bridging loans can be a flexible and convenient way to raise funds when time is of the essence, but they come with their fair share of risks, too, as Lakeside Financial Adviser James Foster explains…
What is a bridging loan?
J: A bridging loan is a way to borrow money in the short term. It literally ‘bridges’ a gap that someone has in their finances while money becomes available from another source, like the sale of a property/assets or another type of borrowing, such as a traditional mortgage.
Why might someone choose to take a bridging loan, and what types are available?
J: Bridging loans tend to be used for property purchases. Unlike regular mortgages, they can be accessed exceptionally quickly and therefore appeal to those where speed is key. For example, you might be buying a property at auction and need to access funds quickly. Alternatively, it could be that your dream home has come on the market, but you haven’t yet sold your existing property. In this instance, a bridging loan would enable you to borrow the funds needed for the deposit while you sell your current home. Another example where a bridging loan might be used is to purchase a property deemed ‘unmortgageable’ that requires doing up to make it habitable. The bridging loan would enable you to buy the property, and then once renovated, you could sell it to repay the loan or remortgage with a traditional provider.
The types of bridging loans are similar to regular mortgages. So, if purchasing a property to live in, it would be a regulated loan, or if buying a buy-to-let or commercial property, it would be an unregulated loan. There are also first and second-charge bridging loans, depending on the amount of borrowing against the property.
Are there any risks to be aware of?
J: Yes. You’ll pay for the convenience, speed and flexibility of a bridging loan in the form of a higher interest rate. As a type of secured borrowing, you’ll also need to put up an asset, such as your property, against the loan. And so, if you fail to keep up with the repayments, you’re at risk of losing that asset. This is why it’s essential to have an ‘exit strategy’ in place - basically, a method by which you can repay the bridging loan ASAP, such as selling an asset, so that you don’t run the risk of getting stuck on a high-interest rate for a significant amount of time. Finally, bridging loans incur various fees, like administration, legal and valuation fees, all of which add to their expense.
How can you assist clients wanting to explore this type of loan?
J: As with any type of borrowing, we would take the time to fully understand the client’s circumstances and objectives before making any recommendations. We would then work with a specialist broker partner in this area to research the market and assess the best options available. For those pursuing this type of borrowing, we can then assist with the loan application and deal with the underwriters to help simplify the process and ensure all legalities are covered.
For further information on bridging loans, please contact: admin@lakesidefs.co.uk
