How and When to Use a Bridging Loan
Recently updated on February 28th, 2023 at 01:24 pm
Bridging loans are short-term financing solutions designed to meet the needs of borrowers who may not be able to receive a traditional mortgage due to not meeting strict eligibility criteria or in the position to wait for weeks or months for funds to clear.
A bridging loan is a short-term loan that can be used to finance the purchase of a new property before you sell your old one. As such, bridging loans often provide much-needed flexibility for first-time buyers and/ or those who have encountered unforeseen obstacles while searching for a new property.
What is a bridging loan?
A bridging loan is a short-term loan that allows you to bridge the gap between selling your home and buying another. It’s usually available for up to 12 months, although some lenders may extend this to 24 months, depending on your circumstances and their eligibility criteria.
How do bridging loans work?
Bridging loans are usually secured against your existing property. They typically last for 12 months, although this is flexible depending on your circumstances and the lender’s eligibility criteria.
Bridging loans tend to have higher interest rates than standard mortgages due to the lender’s relative risk.
When are bridging loans used?
You may consider a bridging loan if:
- You need funds to complete a purchase. If you have already made an offer on a property, but need funds to complete the purchase, bridging loans are often used. Bridging loans are also increasingly used for renovations to maximise the home’s value prior to the sale of the property.
- You need funds to pay for business loans. Bridging loans are often used by business owners to help smooth out cashflow or to purchase inventory or equipment.
What are the benefits of a bridging loan?
A bridging loan is a relatively small, short-term loan that you can use to bridge the gap between buying and selling your current home or getting your new home ready. This enables borrowers to avoid the associated cost (and stress) of renting in the settlement period. Bridging loans are an increasingly popular funding alternative to boost the property’s value via renovations before sale. Businesses also utilise bridging loans for large expenses and as a working capital injection to support smooth operations.
How much equity do you need for a bridging loan?
Depending on the lender, you’ll need at least 20% equity in your home (the more, the better).
Am I going to have to pay more interest on my bridging loan because I don’t have enough equity?
The amount of interest you pay will depend on the type of lender, eligibility criteria, loan term and rates. Whether the loan is for a residential or commercial property may also affect the interest rates.
What is the interest rate for a bridging loan?
The interest rate for a bridging loan depends on the lender but is typically higher than rates for traditional mortgages due to the risk involved for the lender. Credit history and the loan term may also affect the interest rate. As stated above, lenders may charge different interest rates for residential versus commercial property loans.
A good option for quick cash
Bridging loans can be worth considering if you have significant equity in your home and require funding quickly. Bridging loans are a popular alternative for borrowers who have found their dream home and must provide a deposit and/ or settlement quickly (before selling the original home). This way, they don’t lose out on their investment by missing out on solicitors fees and other costs associated with buying or selling properties.
Bridging loans can also be utilised if you’re looking to secure a property before the sale of your current one has gone through, or for businesses who would benefit from a cashflow injection.
Key takeaway
The bottom line is that a bridging loan can be a good option for personal and business borrowers. It’s especially useful for personal borrowers looking for a short-term solution that will give them time to find their next home.
If you’re unsure of whether or not this is the right financial solution for you, talk to your trusted broker or financial advisor about the options available, so they can help you make an informed decision about which type of home loan is most suited for your situation.
Let Mango Mortgages assist you with your bridging loan application.
Mango Credit
Yanis Derums is the Founder and Director of Mango Credit– a leading private lender specialising in bridging loans for personal use and business short term loans for commercial and/ or investment purposes. Yanis has extensive experience with financial analysis, credit assessment, product structuring, and general business management