A bridging loan is a type of short-term loan which is arranged for 1-36 months and is used to provide a fast cash injection while waiting for other funds. It is a form of property finance that is used to bridge the gap between two events happening, such as purchasing one property, and another being sold.

Bridging loans were first offered in the 1960s by large banks and building societies to fund property purchases before the borrower’s existing property was sold. Bridging loans are now a very popular form of finance and are offered by a wide range of specialist lenders.

The bridging loan market has grown to become a £4.8bn industry as of 2022 and is continuing to grow. While this is a large number, the bridging market is still quite niche compared to the mortgage market which is currently a £1,613bn market.

What are the advantages of bridging loans?

The advantages of a bridging loan are:

• Speed – They can be arranged very quickly; you can get a bridging loan in 5-14 days. Some even complete on the day of application, far faster than most alternatives to bridge loans.
• The costs are falling – The bridge loan market is currently in a price war. Rates realistically start from 0.5% per month. The main drawback has historically been cost, although this is now becoming an advantage.
• Flexibility – A bridging loan is far more flexible than mortgages and secured property loans.
• No monthly payments – Where your bridge finance interest is rolled up or deducted, there are no monthly payments to make. This can be a major help to cash flow during a property refurbishment or marketing period.
• A bridging loan allows lending against unmortgageable properties – Bridge loans can be used to buy a property that you would otherwise be unable to borrow against.

What are the disadvantages of a property bridging loan?

The disadvantages are:

• They add cost to a property transaction – No matter how cheap your loan is, it will still cost something. This will add a cost to your property transaction that must be considered.
• Fees and charges – Comparing quotes from bridging loan lenders or brokers can be difficult. On top of the lender arrangement fee and interest payments, some lenders will charge additional ‘fund management’, ‘application’, ‘inspection’ or other fees. These can add up and mean that the lowest rate isn’t always the best option. When comparing bridging loans, you must consider all the costs to calculate the total cost rather than just the headline figures. Business Finance Expert will happily assess this for you.
• Problems with exit route – If you have problems with your method of repaying, this can cause major issues as the end of the bridging loan approaches. If you are unable to repay the loan at the end of the term, you will have to refinance or pay the interest charges monthly. Although there is no guarantee your lender would allow you to do either, failure to do so can put your property and credit score at serious risk. This type of finance is a short-term finance solution, so it’s important that you repay on time, or risk losing your property.

If you want to discuss a bridging loan in more detail, please get in touch