What is a Bridging Loan?
I know for the experienced property developer they will know the ins and outs of a bridging loan. But for the people out there still confused I am going to try and explain what one is. We all start somewhere right?
So in simple form a bridging loan is a type of short term loan, typically taken out for a period of 2 weeks to 12 months. A bridging loan is interim financing for an individual or business until permanent financing is obtained. So if a developer has a project they need to move quickly on but hasn’t secured permanent finance they can take out a bridging loan to cover the time needed to find permanent funds. Money from the new financing is generally used to pay back the bridge loan. A bridging loan could also help you buy a property while you are waiting for the sale of your existing home.
Bridge loans are typically more expensive than conventional financing because they carry a higher risk. They usually have a higher interest rate also, the lender may require cross-collateralisation and a lower loan-to-value ratio. Currently lenders are offering finance from £5,000 to £250 million with LTV’s around 65% to 80%.
On the other hand a bridging loan can be completed very quickly and with minimum documentation. Some lenders are offering completions within 3 to 5 days with an average of around 4 weeks.
So I hope this little guide has helped a few people understand what a bridge loan is.