Bridging Loans For Property Investment Explained

Bridging loans are a handy tool for property investors who want to move quickly and buy a property without having to wait for their mortgage lender to make a decision, or when they are moving between properties and waiting for a sale to complete to free up some funds. It is however important to be aware of the risks of bridging loans. Read on to discover what bridging loans are, how they work, what you can use a bridging loan for, what happens if you default on a bridging loan, the pros and cons, and more.

Table of Contents

What is a Bridging Loan?
How Does a Bridging Loan Work?
What Can You Use a Bridging Loan For?
What Happens if you Default on a Bridging Loan?
Bridging Loans Pros and Cons

What is a Bridging Loan?

A bridging loan is a short-term secured loan that ‘bridges’ the gap when funds are required for a longer-term financial investment. They allow the borrower to access funds while they are waiting for cash to be released elsewhere, e.g. on a house sale that is taking some time to complete. There is an element of risk to a bridging loan, as it will need to be secured against property you already own. Failing to pay off a bridging loan means that your property could be repossessed. Bridging loans are faster to obtain than a mortgage and do not take into account the borrower’s salary or credit score. Instead, they are based on the value of the property the borrower can offer as collateral.

How Does a Bridging Loan Work?

There are two types of bridging loans – open and closed. An open bridging loan is paid back within 12-24 months and is often more expensive due to its flexibility. These may be used by someone who has found a property they want to buy but is waiting for the sale of their own property before they can buy it and don’t want to miss out on the opportunity.

A closed bridging loan is more short-term and has a fixed repayment date, and for this reason is cheaper than open bridging loans. This could be used by someone who has sold their property and hopes to use the funds to buy a new one, but they are waiting for the sale contract to complete and they want to be able to buy the new property quickly.

There are also first charge and second charge bridging loans. A ‘charge’ is placed by the lender on your property when you take out a bridging loan on a property you own outright, i.e. without a mortgage. A second charge bridging loan is when you have a mortgage out on the property you are using as collateral. This means that the lender for the bridging loan will get their money after the mortgage provider if you default on the loan and don’t pay either the bridging loan or the mortgage back. As you would expect, second charge bridging loans are harder to obtain and cost more in interest. All bridging loans have a fairly high interest rate when compared to most mortgage products, but offer some flexibility to property investors.

You will also need to have a plan for when and how you intend to pay the money back for a bridging loan, this is called an exit plan. Depending on what you use the bridging loan for, exit plans can vary.

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What Can You Use a Bridging Loan For?

There are a few situations in which you may need a bridging loan. Say, for example, you find a property that would be a great investment for you, but you want to make an offer quickly without waiting for your mortgage lender to make a decision. A bridging loan could be used to bridge the gap between making an offer and receiving mortgage approval.

You can also use a bridging loan to make improvements or renovations on a property before you can rent it out or sell it. A bridging loan can provide the funds needed to get the work done quickly, so you can then refinance the property and pay back the loan this way, or start renting it out.

It’s not uncommon for a property chain to break, which is a frustrating experience for all involved. If you are waiting on someone else to sell their house before they can buy yours off you, and they have a buyer who ends up pulling out of the sale, you can use a bridging loan to buy the new property you hope to purchase and pay it off when your property finally does sell.

If you find a property at an auction you wish to buy, you may need to provide the funds quickly, usually within 28 days of the sale. You can use a bridging loan to pay for the property and then secure more long-term financing like a mortgage once the property is yours.

What Happens if you Default on a Bridging Loan?

Much like mortgages or other forms of secured loans, if you don’t repay a bridging loan in the time specified, the lender could take steps to repossess the property you secured the loan against. Obviously, this is something you want to avoid, so make sure you have a solid exit plan in place when taking out a bridging loan.

Bridging Loans Pros and Cons

Pros of Bridging Loans

A bridging loan can be paid out in a few days, unlike a mortgage which can take much longer.
You can borrow a lot more money with a bridging loan than with an unsecured personal loan as it is secured against property.
There are lots of options available with bridging loans, from the very short-term loans of a couple of weeks to a longer-term loan of 12-24 months. They may also offer fixed or variable interest rates and more open-ended terms.

Cons of Bridging Loans

Bridging loans are quite high-risk, so they tend to have higher interest rates that are calculated monthly than regular mortgages.
There are other fees involved in bridging loans, from arrangement fees to early repayment fees and more.
There is a significant risk involved, as you may lose your property if you don’t pay back the bridging loan.

Bridging loans are a great tool for giving property investors more flexibility than other financing options. They do come with risks, so you should use them strategically, always have an exit plan, and make sure you have a clear understanding of the loan repayment terms.

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