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The term “Bridge loans” is becoming increasingly popular throughout the UK, even though many people fail to understand of know what it means. In this blog post we will be trying explain basic information about bridge loans or bridging finance, and when these types of loans are appropriate.
What are bridging loans?
Short term bridge loans or bridging finance are a temporary short-term business loan which is offered through a bridge loan lender ‘bridge the gap’ between funding and securing longer term finance like a mortgage or bank loan. Most property and commercial business owners may use a bridge loan to help secure funds quickly and simply, for example;
ü Property developers could use a bridge loan to buy a new property before or without selling an existing one.
ü Commercial business owners could use a bridge loan to help fund a project or service that has overspent.
Bridge loans can be divided in two categories:
- Closed bridge loans and;
- Open bridging loans
Closed Bridge loans:
Closed bridging loans are normally used by the borrowers when they need short-term finance until they can secure a longer term source of finance, such as a mortgage. With a closed bridge loan the loans term is generally known or the borrower will have a rough indication of when this longer term funding solution will be available. As a result the interest rates of closed bridge loans are generally much lower when compared to open bridge loans.
Open Bridge loans:
Open bridging loans are used when the borrower doesn’t currently have a long term solution in place. As was mentioned previously, because open bridge loan terms are not known they will attract a higher rate of interest. These types of loans are usually taken out when other funding solutions are exhausted, however, open bridge loans do enable people to qualify for bridge loans even if they have bad or adverse credit history.
Most bridging loan lenders will usually suggest borrowers go with a closed bridge loans as opposed to an open bridge loan, helping to minimize interest and costs incurred.
Bridge loans vs Regular term loans
Bridge loans are used for short-term needs, whilst a regular term loan, such as a mortgage would be taken out over a longer period of time. One major difference in between a bridge loan and a regular loan is that because a bridge loan requires an asset or property to secure against it, credit checks are minimal and so approval will be instant, and funds are generally transferred within days of applying (in some cases same day). Whereas with a mortgage, credit checks and due diligence can push into weeks and even months before an approval decision can be made.
What can we use bridging finance for?
Most of the borrowers who use short term bridge loans or bridge finance solutions generally use them to purchase or renovate any property. They becoming particularly useful when making purchases which have time constraints, such as property at an auction. However, more recently it has become more of a trend for a bridge loan to be taken out for an kind of business requirement. These include;
- Paying large tax bills
- Paying supplier bills
- Kick starting new projects or services
What are the interest rates like on a bridge loan?
As can be expected, due to their quick availability and instant decisions, bridge loans will generally carry a higher interest rates than a regular bank loan or mortgage. However, by taking out a bridge loan and getting access to funds quickly, could help negotiate a better price on a property, or even allow the borrower to hold onto their property longer until its value increases or a viable offer comes along.
How bridge loans help property developments?
Let’s assume that a property developer has secured permission from the council to build a small apartment block, but the developer failed on their first attempt to get a bank loan. Here a bridge loan is the ideal situation. By taking out a bridge loan the borrower can begin the development and work on finding another bank or mortgage provider for a more permanent finance. Alternatively, if the borrower is looking to turn around and resell the apartment quickly, they may not even need a long term mortgage, as they can repay the bridge loan upon the sale of the apartment block.
Commercial Bridge loans can be used for any kind of commercial requirement, and are not restricted to property transactions. Again, as an example, let’s assume that a business has developed a great idea for a new product that will innovate and revolutionize their industry, but because all funding is currently tied up in other avenues and customers are late paying their invoices, there is no money available. Here, by using a closed bridge loan they can begin the development of their product immediately, paying the bridge loan off when the extra funding is available.
Is there any extra costs with bridging mortgages?
Most bridge loan lenders across the UK will not charge any additional costs, but it does differ from firm to firm. Most lenders will generally charges administration and arrangement fees, which are collected when the loan is drawn down at the end of the term. It is always important to read the terms and conditions properly, before agreeing to any type of bridge loan.
Are bridge loans good for property refurbishment?
Yes, bridge loans are the perfect way to fund property renovation. Generally the turn around on a property renovation is much smaller than a full development, which in turn can allow for a quick turn around and sale. Many developers will use a bridge loan specifically for this purpose, allowing them to turn properties around quickly without having to rely on banks or mortgage providers.
Who are Bridge Direct?
Bridge Direct are lenders, and not brokers, with over 30 years of experience in the bridging and finance industry. When you speak with Bridge Direct, you are speaking directly with the lender, so there are no middle men, and every deal is assessed on its own individual merit, and there is not set criteria.
Bridge Direct will give an instant decision to all bridge loan enquiries and will accept 1st and 2nd charges, you may be eligible for a loan even if you have bad or adverse credit history.
The team at Bridge Direct will give you an instant decision on your bridge loan request, and in some cases funds may be available to you on the same day.
You can reach the team at Bridge Direct for all your bridge loan applications by calling on 020 3126 4969 or even complete their simple online application form at www.bridge-direct.com.