The Pros and Cons of Bridging Loans

Bridging Loans are a short term interest only loan that can be taken out by borrowers to purchase property without having to sell their existing one. They are commonly used with landlord, property developers and to purchase properties in auctions.

Bridging loans come in two forms. A closed bridge is a loan that is obtained with a guaranteed exit, as a long term solution has been established and an open bridge loan is used when there is no definite exit date because no long term solution is in place yet. It is important to look at bridging loan rates before applying as they are usually very costly and much higher than mainstream mortgages.

Bridging loan can be arranged within a few days or in some cases, even sooner. With a bridging loan, you may either borrow up to 70-75% of the property value. Alternatively, lenders will look at your affordability and determine how much you can borrow by how much you are able to repay (in this case your exit strategy will be reviewed).

Pros

  • Speed: The biggest pro with bridging loans are there approval speed. In extreme circumstances, approval rates could be as soon as a couple hours or a couple of days, the longest. The reason for this is because there is next to no risk on the lender themselves and all on the borrower, because f you are unable to pay then the property is taken as collateral.
  • Flexibility: Mainstream mortgages not only take a long time to be approved but also take a long time to pay off. With bridging loans you can pay off the debt as soon as you are able to, which could be within a few months of obtaining the loan if you gained the capital without having to pay an early payoff fee.
  • Payment levels: There are many different payment levels with bridging loans depending on their interest rates, however, if you opt to have the interest retained then you don’t have to pay any interest on your loan until it has all been repaid.

Cons

  • High interest rates: Interest rates for bridging loans can vary depending on which broker you use however, they are all consistent in charging high interest rates as they are receiving their money back in a much shorter amount of time than mainstream mortgages.
  • Not a long term solutions: It is a gamble for newbies into the property game to take out of bridging loan as there is no long term guarantee. They are designer to give you quick cash which you pay back just as quickly so you would need to have a mortgage set up or sell your property to pay them back.
  • Fees: Fees for bridging loans can be extremely costly and are much higher than for a mainstream mortgage brokers. On average, you will pay around 1.5% which is taken out of the loan and additional fees such as broker fees can be added, depending on the broker you use.

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