A Bridging Loan Explained

People use bridging loans when they need to make a purchase, but they have to wait for access to the money that they plan to get from selling something else. These loans are commonly used by people who want to purchase real estate, but they have to sell another piece of property in order to get the funds to pay for the property they want to purchase. Bridging loans are secured by the asset, like real estate.

What Can A Bridge Loan Pay For?

You can use a bridge loan for many types of purposes. Some examples include:

  • Real estate purchase
  • Real estate development
  • Investment in rental property
  • Tax bill liability
  • Entrepreneurial ventures
  • Settlements in a divorce

Property developers who won a bid in a property auction will usually use a bridge loan to place a down payment on their purchase in order to secure it.

Money For Property Development

Real estate developers and landlords like to use bridge loans to fund real estate projects from which they want to make a quick sale, fast bridging finance are a way for a lot of people to move forward.

Bridge Loans For Residences

People who are planning to move will often seek bridge loans as well.

Bridging loans come in two kinds.

Open Bridge Loan

Typically, a year long, but can be longer. These loans have no maturity date. You can repay the loan whenever you have the money to pay it off.

Closed Bridge Loan

Term loans are much shorter, usually only for several months or weeks. There is a predetermined maturity date that is based on when you are able to acquire the funds to replay the loan.

When comparing open bridge loans to closed bridge loans, open loans cost more because they offer the benefit of flexibility. Regardless of the type of loan you choose, you need a way to repay the loan.

Choosing The Right Bridge Loan

There are some things to consider when you are doing your initial research on bridge loans:

  • What is your loan amount? The amount can range from £5,000 all the up to more than £10 million.
  • When can you pay back the loan? The loan terms can range from one month to a couple of years.
  • Do you have an existing mortgage on the property? This will have an impact on how big the bridge loan can be. It can play a role in determining whether you get a first charge loan or second charge loan.

Deciding Between A First Charge and Second Charge Loan

If the bridge loan is the first or only loan that is secured by the piece of real estate, this is a first charge loan. A mortgage is typically a first charge loan. If your property is free and clear of mortgages or other debts against it, a bridge loan is a smart way to get funds.

When a piece of real estate already has a mortgage, another loan made against it becomes the second charge loan. Typically the lender of the second charge loan has to obtain permission from the first charge lender in order to be added.

A piece of real estate can have an unlimited number of loans charged against it.