They sound old-fashioned but bridging loans are very much still a thing.
If you’re looking for immediate finance to buy a property, a bridging loan could be the solution you’re looking for, advises Mike Collins, financial planner.
Bridging loans provide a flexible and short-term stopgap for any pitfalls you may find yourself in.
Perhaps you need to pay for a property outright at auction? Maybe your dream home is in sight but you haven’t sold your current property – and don’t want to lose the potential new house.
You might need to cover any unexpected business costs.
Mike Collins Mortgage Expert says: “I’ve worked in the industry for 17 years and I often get asked about bridging loans – and the main worry is always what the pitfalls are. But if you use them correctly as they are intended and have a good exit strategy for paying it back, there’s no problem.
“Hopefully this article will help you decide whether bridging finance is the right option for you at this time.”
High interest rates
Interest rates on bridging loans are higher than other finance products and it’s important to realise how high interest rates are just now.
But a bridging loan is designed to be a short-term loan. It should be paid back within two years ideally, making the interest more controlled and therefore, the loan more affordable.
Of course you can get a fixed interest rate and this is great, providing you’re able to keep up with the monthly repayments.
Variable loan rates change in line with the Bank of England base rate, which is 3.50% today (Jan 2023). The base rate influences the interest rates that many lenders charge for mortgages, loans and other types of credit they offer people.
Rates can be different depending on what the loan is being used for but as a general rule, rates for bridging loans for businesses are more expensive than one for a residential purchase.
Quick access to cash
If you just need to get your hands on cash quick – and it’s normally a panic feeling of missing out on a purchase – it’s good to know that a bridging loan can be turned around in as few as three days… another reason why they fit the bill for so many buyers.
It’s much faster to arrange because the lending decision tends to rely on your exit strategy. That is, how you plan to pay the loan back when the term is over.
Bad credit? No worries.
As with most things financial, your credit rating can determine whether you’re accepted for a bridging loan.
The good news is, you can still get one even if you do have bad credit as lenders tend to place greater emphasis on the value of the property related to the loan than your credit score when considering rates.
Due to the loan being secured on an asset of value, there are no lengthy checks made.
Whichever bridging loan you end up picking, just be sure to check the lender is a member of the Financial Conduct Authority (FCA). This means any complaints can be dealt with in the proper channels – the FCA guidelines.