Bridging loans have been experiencing a boom in popularity. While previously mislabelled as risky or confusing, people are developing a greater understanding of bridging loans (also known as bridge loans or swing loans in the US).
In this guide, we explain the recent popularity of bridging loans and how they are used as quick way to secure funding against a property.
What are bridging loans?
Bridging loans are a type of short-term loan used to buy properties under a tight deadline.
They exist to provide borrowers a huge sum of money and to make someone a cash buyer, usually within days. This is to ‘bridge the gap’ between two transactions, for example between buying your new property and selling your old one. Or perhaps someone buying a property at auction within 28 days or trying to win a property developer in a short space versus other competitors.
They typically last from 3 months to 24 months, after which a more stable, long-term type of lending or borrowing should be implemented.
Why are bridging loans so popular?
Bridging loans have soared in popularity due to fast turnaround time, since you can often access the money within days, as opposed to months, which effectively allows you to make an offer as a cash buyer.
The eligibility criteria varies between lenders, but there is often a lot of flexibility. Borrowers with a bad credit history or history of bankruptcy will not be immediately looked over if the investment seems like a profitable one.
Since the global financial crisis of 2008, it has been increasingly difficult to receive loans, funding and mortgages from traditional banks – something that has been the first place for consumers and businesses for centuries. Throw in the scarcity of property and increasing Bank of England Base Rate, and this desire for alternative funding becomes manifest.
With bridging loans, there is a wave of new more personable, challenger lenders and private institutions who can turn things around quicker and take a view on different backgrounds, including the likes of Masthaven, Precise and MT Finance.
Do I qualify for a bridging loan?
While the qualifications for a bridging loan depend on each lender, many will consider any UK resident with a relatively low income-to-debt ratio.
Your lender will ask to see information such as your plans for the property, as well as doing a check of the property itself.
People with low credit scores are not automatically excluded from taking out a bridging loan. Many lenders will still consider such applicants as long as they have a smart and feasible plan as to what they will do with the property.
What sort of property qualifies for a bridging loan?
There is a huge range of property that can qualify, including homes, flats, factories and offices. However, most lenders are likely to reject applications made by people wanting to buy land, or institutions such as schools or churches.
Are there hidden costs involved in bridging loans?
Lenders should be transparent about the fees involved. These can include arrangement fees, legal fees, and exit fees. Make sure you double check with your lender before agreeing to the loan, but do remember that fees are to be expected.
Because bridging loans provide such a huge amount of money at such short notice, they carry very high interest rates. This means that buyers should only consider bridging loans for very short amounts of time, when cash is needed quickly. It can be wise to switch to a long-term lending option once this period is over.