The Use of Bridging Loans as a Mortgage Opportunity

Recently updated on February 21st, 2023 at 12:23 pm

Many people invest in property to help secure their financial future and build wealth over time. Property investors often use a bridging loan as a deposit (or to purchase the property outright).

But what is a bridging loan, and how can you make sure you are getting the most from your money?

Read on to learn more.

What is a bridging loan and how does it work?

A bridging loan is a short-term loan that helps to ‘bridge the gap’ between two financial transactions. For example, if you are selling your old home and buying a new one, you may need a bridging loan to help you pay for the new home whilst you are waiting for the sale of your old home to go through.

Bridging loans can also be used for other purposes, such as renovations or business expansion: or as a deposit, or to purchase an investment property outright.

Bridging loans are typically secured against property, are renowned for having flexible terms.

The benefits of using a bridging loan for property investment

Here are two of the top benefits of using a bridging loan for property investment:

Speed

Bridging loans are usually a quick and relatively easy way to raise finance for a property purchase.

• Versatility

Bridging loans can be used to buy properties at auction or buy properties that need refurbishment or repairs. They can also be used to buy multiple properties, as the loan can usually be spread across multiple investments.

How to find the best bridging loan for your needs

When looking for a bridging loan, it is important to compare different deals from a range of lenders to make sure you get the best funding solution for your requirements. A finance broker is also well placed to help with this decision.

Here are some things to consider when comparing bridging loans:

• Interest rate

Comparing the annual percentage rate of different loans will give you an idea of the overall cost of the loan.

• Loan term

Bridging loans are typically short-term loans, so make sure you know how long you will need to repay the loan.

• Loan amount

Know how much you need to borrow and compare this with the loan limits of different lenders.

• Fees

Some lenders may charge arrangement or exit fees, so make sure you factor these into your comparison.

• Security

Bridging loans are typically secured against property, so make sure you are happy with the level of risk involved before taking out the loan.

Things to watch out for when taking out a bridging loan

Some things to watch out for when taking out a bridging loan are:

• The interest rate

Bridging loans typically have higher interest rates than a mortgage from traditional lenders that correlates with lender risk and loan term (most bridging loans are short-term loans versus a longer-term home loan, which is usually up to 30 years).

• The repayment period

Bridging loans usually have short repayment periods, which can put pressure on your finances if you are not able to sell the property quickly or find alternative funding. That said, many lenders offer ‘capitalised interest,’ which means you don’t pay for the loan until your property is sold. The repayment period will vary from lender to lender. It’s wise to involve a finance broker and/ or your accountant if you’re unsure of any aspect of the loan.

• The fact that your property is at risk

Bridging loans are usually secured against property. Like all loans, it’s really important to ensure that you can comfortably repay the loan to minimise the risk of exposure.

Key takeaway

A bridging loan is a type of short-term loan that can be used to finance the purchase of a property before longer term financing is in place. Bridging loans are often used by investors who are looking to quickly seize an opportunity in the real estate market.

Bridging loans are an increasingly popular alternative as they allow the borrower to leverage their existing equity to purchase a new property. Whilst the interest rates on bridging loans are typically higher than those on conventional mortgages, the flexibility and speed of funding make bridging loans an attractive option for many investors.

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