Understanding The Bridging Finance Process
Bridging loans have become an increased source of funding in the real estate and construction industries, even more so in today’s post-pandemic world. This article delves into bridging loans, helping you understand the bridging finance process.
What Are Bridging Loans?
Bridging loans cover financing gaps between two transactions. They are a type of short-term funding, usually lasting between 1-24 months, used to “bridge” the gap between a purchase & arranging or being able to set a longer-term source of finance.
How Do They Work?
There are numerous types of bridging loans, from developer finance to auction finance, and your application process will depend on your requirements and situation. Lenders will assess your loan application and should you meet the loan criteria, provide you with the short-term finance you require.
Bridging Loan types
Bridging loans come in four main types, open, closed, first charge and second charge bridging loans.
Closed bridging loans are when the exit strategy for the loan is clear from the outset and are the most common type of “bridge”. This means the borrower knows exactly how they will repay the loan to the lender at the end of its term. They are the preferred choice for many borrowers, especially those with a significant guarantee of closing the sale of their current properties.
Open bridging loans generally don’t have a specific exit strategy, or the exit has no set date when the bridging loan is taken out. Lenders require significant proof of repayment from open bridging loan borrowers owing to their risk profile.
First charge bridging loans apply when borrowers are the direct owners of the property with multiple financial commitments to the property. Levying a first charge on your bridging loan means borrowers are mandated to settle bridging loan lenders before satisfying other financial obligations.
Second charge bridging loans apply if borrowers have mortgages tied to their properties. Lenders will demand to finance the mortgage before settling other lenders with vested interests in the property.
Bridging Loan Charges
Bridging loans come with interest rates higher than traditional financing options. Beyond the interest rates, bridging loan lenders will insist on other charges like admin, exit, legal and broker fees.
Should I Opt For Bridging Loans?
It’s always advisable to discuss your situation with a specialist bridging finance broker to decide whether this is the right path for you. There will be fees associated with using a broker, but they will assist you throughout the process to get you the best rates and ensure all the loan requirements are met and understood, whilst also providing peace of mind.