A bridging loan is usually used to cover a short term cash requirement. Commonly bridging loans are repaid in between six and twelve months, although the option of a timescale greater than twelve months is available. In simple terms a bridging loan is like a short term mortgage, for example it can be used to pay for a new house if someone is waiting for the sale of their existing house to go through, the sale of their house allows the person to repay the bridging loan often in full after a couple of months.
Bridging loans are not only used for helping with the transitional period of buying a house, in particular for business purposes. If a business is having a short term cash flow problem, a bridging loan can be used to rectify this situation. Also if a company is struggling or looking to sell to an investor, a bridging loan can be used to carry that business through until the investor completes the purchase of the business. Bridging loans can also be used for simple everyday uses such as financing a holiday or the purchase of a new car if the person is going through a short term cash problem.
There are two different forms of bridging loans which are open and closed. A closed bridging loan has a specified repayment timeframe in the agreement. An open bridging loan on the other hand has no specific pay-off date which means they are much more flexible. The average interest rate on a bridging loan is around 12-15%, although this figure can vary depending on numerous factors such as credit rating, repayment timeframe and security. The bridging loan is commonly secured against property; this property can be private, commercial or a piece of land. The finance lender has a stake in that property until the short term loan is fully repaid. It is difficult to find bridging loans on the high street, they are often found from specialist finance companies and commercial mortgage brokers.
Bridging loans offer an effective rest bite for customers, especially if they are going through a high pressure situation of buying and selling a house. They can also be used for renovating houses, the bridging loan can be used to pay for the property at auction, renovate the property then sell on the private market to repay the loan. It is important to negotiate a fair interest rate with the lender and estimate a realistic timeframe in which the bridging loan is likely to be fully repaid.