Pros And Cons Of Bridging Loans

Pros And Cons Of Bridging Loans

A bridging loan is a short financing method that typically lasts for six to twelve months. For the loan’s security, lenders usually require collateral such as a real estate property.

The purpose of this mortgage is to systematically ‘bridge’ the gap between two situations commonly found in the real estate industry. A specific example is utilising a bridging loan to purchase a new property while awaiting the sale of another estate.

Sounds fascinating, right? Definitely. This article will highlight its distinct benefits and inherent risks if you’re interested in applying for a bridging loan. 

Pros

Rapid Financing Is Possible

Presently, bridging loans are unregulated by the government of the United Kingdom. Private lenders are rapid and quick in establishing loan arrangements due to the absence of regulatory obligations. 

The ‘fast processing’ notion creates particularly desirable offers for prospecting clients, especially those who need immediate funding. For this reason, this financing system can be extremely competitive.

Flexible Repayment Options

An appealing aspect of acquiring a bridging loan is that the client can opt to add their monthly interest payments to the last loan payment. This option translates to no repayments for the duration of the loan term.

This condition can be very beneficial to real estate investors. These investors typically wait until the sale of their redeveloped and refurbished properties. Because there’s no income until the sale of such properties, they apply for a bridging loan to finance their new real estate projects.

Utilised For Diverse Purposes

Another fantastic feature of loan bridging is that it can be used for multiple purposes, most specifically in the real estate industry. Whether you’re saving for your home renovation or planning for your house construction, applying for bridge financing is a smart move to do.

Cons

Elevated Interest Rates 

Reasonably enough, bridge loans have relatively higher interest rates if you compare them to traditional mortgage loans. The facts even paint a clearer picture when you see that a bridging loan can charge up to 1 to 1.5% monthly, which sums up between 13% to 19% Annual Percentage Rate (APR). Traditional mortgage loans commonly have an average of 5% APR.  

Because of its steep rates, it’s safe to say that you have to think carefully about whether you sincerely need a bridging loan or go for a mortgage loan.

Having Multiple Fees

Adding to elevated interest rates are charged fees, which are also hefty for bridging loans. Arrangement fees can cost you somewhere around 1.5%, alongside other expenses such as valuation, legal, and brokerage fees. These charges will be added to the final loan amount.

Its ‘Unregulated’ Status

A persistent issue with this type of financing is that it’s unregulated. Because of this, loan applicants and borrowers alike have no protection from the Financial Conduct Authority (FCA). It’s therefore imperative that debtors should carefully scrutinise lenders who offer this type of loan. 

Bridging Loans: A Good Idea?

Unarguably, bridging loans can address several situations, namely, property purchase, development, and investment. Funding can be quick, and repayment options are flexibly structured. Its trade-off comes in its steep interest rates and hefty fees. 

Additionally, getting this loan is an option if a mortgage loan is unattainable and immediate funding is necessary. To close it off, obtaining a bridging loan can be very beneficial but very costly. Therefore, it’s critical to consider your financial situation and carefully weigh your options.

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