For many people, owning property is a major goal in their lives. You might simply want to own your home so you have more control and security over where you live, or you may want to buy multiple properties so that you can create a passive income through your assets.
In any case, most people look to mortgages and other loans when buying property. This is because people rarely have that much capital on hand to spend on a home, and, even if they do, there are benefits to buying through credit and loans rather than cash.
While mortgages are the most common type of loan, some people prefer to use a bridging loan when buying property.
What is a Bridging Loan?
In simple terms, unlike a mortgage, which involves monthly payments that are repaid over years, bridging loans are short-term loans that are secured against property. They usually last up to eighteen months and can sometimes be over within a few weeks. Bridging loans can work perfectly if conventional loans won’t work for your situation, or you only want a short-term loan to worry about.
Essentially, they’re designed to bridge a gap in your funding so you can make a purchase you can’t quite afford and pay it off quickly. So if you’re buying a second home and plan to sell your previous one, you can use the money from the sale to pay off a bridging loan.
Risks and Benefits of a Bridging Loan
As with any loan, bridging loans have pros and cons. The most compelling reason to get a bridging loan is that they’re quick. So if you know you’re going to get the cash you need but don’t have it yet, a bridging loan allows you to purchase a property sooner.
You can also buy properties that are ineligible for mortgages, and you can use them for land, refurbishment projects, and both commercial and residential properties.
Essentially, bridging loans are a quick and very flexible option, and you can often pay them off early to reduce your interest repayments.
But, as with any loan, there are some risks and downsides to bridging loans. The interest rate is usually higher because it’s a short-term loan. There’s also the fact that the loan is secured against property and you have personal liability, so if you default on the loan, you may have to sell your property and potentially other assets to pay the loan.
How Much Can You Borrow?
There are a lot of factors determining how much you can borrow, such as the value of the asset you’re securing the loan against and potentially your credit score.
Unlike other loans, the interest isn’t quoted as an annual APR, but it is quoted monthly and is retained from the loan itself. This means that, depending on the loan details, you may need to get a larger gross bridging loan than the cost of the property you’re going to buy, so the net advance you actually receive meets the purchase price.
For example, if you need £280,000, you may need to get a gross loan of £300,000. You can use a bridging loan calculator to work out what your gross loan actually needs to be, working back from how much you need from the net advance.
