Bridging Loans Meaning

Whether you need to upgrade to a new home, seize a property investment opportunity, or buy a new place before selling your current home, financial flexibility is an extremely powerful tool.    

This is where bridging loans come in.  

They’re a temporary financial lifeline designed to bridge the gap between any transactions you need to make – particularly for (but not limited to) property purchases. 

Over the last decade, bridging loans have gained popularity as a flexible and accessible alternative to the traditional lending options available on the market.  

In this article, we explore the fundamentals of this type of loan, the benefits they can offer, and the essential considerations of bridging loans.  

We'll cover their mechanics, the different types you can access, and potential risks involved.  

What are bridging loans? 

Bridging loans, also known as bridging finance or bridge loans, are short-term loans designed to provide immediate funds to bridge the gap between property transactions.  

Hence the name! 

They are drafted in by many people to act as a temporary financial solution, offering you quick access to capital when traditional forms of financing may not be available, but time is of the essence. 

These loans are typically used to cover a financial shortfall during property transactions, such as purchasing a new home before selling the existing one. 

For many people, this is the only context they’ve ever heard of them being employed. 

For example – you've put down an offer on a new home, and your current one is about to sell to fund the purchase.  

But your buyer pulls out at the last minute.  

And you’re forced to withdraw your offer on your new home – the one you’ve been dreaming about for months.  

This is perfect for a bridging loan.  

A bridging loan can be quickly arranged so you can complete your purchase, and then repay it when your home eventually does sell.  

They’re secured against your property, so the rates aren’t extortionate, and you’ll only pay interest for the months that you’re using your loan – so, if you pay it back early, you can save on interest and there are no ERC (early repayment charges).  

But with that being said, they can also be utilised for other purposes, such as seizing an opportunity in business, making renovations on a rental property, or addressing those unexpected financial obligations which often crop up in life. 

Bridging loans are known for their high speed nature and flexibility of use.  

Because they’re intended to offer you a quick turnaround, the application process is often expedited, with minimal documentation needed to get approval and a faster timeframe compared to conventional loans.  

This means you can get your cash faster, providing you can meet a lender’s criteria.   

Because they’re so convenient, interest rates for bridging loans tend to be higher than those of traditional long-term loans. Mostly, this is down to the short-term nature and increased risk which lenders associate with them.  

However, you can often work with the lender you select to negotiate flexible repayment options, like the ability to defer interest payments until the loan term ends or the property at the centre of the arrangement is sold. 

Whilst they gleam with potential and may seem like the ideal solution, it’s important to remember that bridging loans are a highly specialised form of financing and may not be suitable for everyone.  

As with any financial decision you’re faced with making, careful consideration should be taken surrounding the terms, extra costs, and risks associated with bridging loans before you proceed in applying. 

What can I use a bridging loan for? 

As we highlighted earlier, the uses of bridging loans are plentiful.  

Property Purchases 

The most popular use for bridging loans is to facilitate smooth property transactions. 

They can help ‘bridge’ the monetary gap which may exist between purchasing a new property and selling the one you already own.  

Ultimately, it can provide funds to put down your deposit or cover the full purchase price until the sale of your previous home is finalised. 

This allows you to snap up the home you want.  

Property Development 

If you're undertaking a development project on your home or rental property, a bridging loan can arm you with the necessary capital to acquire a property (if you’re a developer), cover construction and remodelling costs, or facilitate any much needed improvements. 

Auction Purchases 

Bridging loans can be an advantage to have up your sleeve when participating in property auctions. 

In this scenario, immediate funding is required upon a successful bid both by law, and for your own ease of navigating the transaction (usually a 30-day time limit).  

Bridging loans allow you to secure the property you’re after quickly, and buy you time to arrange a more long-term financing option (a standard mortgage), or even sell another property to repay the loan. 

Business Ventures 

Bridging loans can support you in making your business expansion plans a reality. 

Things like acquiring new equipment, investing in inventory, or funding operational expenses during a transitional period all add up. 

A bridging loan can help you continue operations effectively whilst getting you the cash injection you need.  

Short-Term Cash Flow Needs 

In some situations, people or businesses might require immediate access to cash. Let’s face it, unexpected expenses do crop up from time to time! 

A bridging loan can help you meet these expenses, pay urgent bills, or bridge a temporary cash flow gap if you’re waiting for payment from a customer.  

Bridging loans can provide a short-term solution until funds become available through other means. 

It's essential to note that while bridging loans offer those who use them flexibility, they should be used prudently in any case.  

Before taking one out, you should carefully evaluate you financial circumstances and assess the feasibility of making regular repayments within the loan term.  

Instead of jumping the gun and applying, the first step you take could be seeking professional advice from financial experts or mortgage brokers.  

They can help ensure that a bridging loan is the appropriate solution for your specific needs moving forward. 

Types of bridging loans 

As well as the many financing options available on the market, each one usually has subcategories.  

There are a few different types of bridging loan: 

Open bridging loans An open bridging loan has no fixed repayment date, although it usually has a maximum term (usually 12 months).  

For example, if you're selling your current property, you might not have a fixed date on when the sale will complete – so it will be an open bridging loan. 

Closed bridging loans A closed bridging loan has a… you guessed it, fixed repayment date.  

The date in question will usually be based on when you know you’ll have your funds available.  

For example, a lot of people know when their house sale will go through when they seek this type of financing. Or they’ll have an inheritance coming through on a set date that they’ll use to repay their loan, for example. 

This type of loan is usually cheaper than an open bridging loan because there is less flexibility available around the prospective repayment date. 

Remember, whichever type of bridging loan you go for, lenders will usually want to see details of how you plan to repay it, known as your ‘exit’. This could be from a property sale or a business transaction, or securing a standard mortgage. 

Unregulated and regulated bridging loans  

Regulated Bridging Loans are used when you are purchasing or securing a mortgage on a residential property in which your or than eir immediate family plan to live. 

They're regulated in order to protect individuals who are securing funding against their primary residence. 

Unregulated Bridging Loans are used for properties that the borrower does not intend to live in, such as investment properties, commercial properties, or land. 

Regulated Bridging Loans s are regulated by the Financial Conduct Authority (FCA), while Unregulated Bridging Loans are not. This means borrowers do not have the same level of protection and recourse that comes with a regulated loan. This doesn't necessarily mean they are risky, but it does mean the borrower needs to be more cautious and diligent when reviewing the loan terms. 

Bridging loan vs personal loan? 

In general, bridging loans are better for large sums of money (over £50k) and that are secured against property, while personal loans are usually capped at £25,000.  

However it’s essential to consider the specific circumstances you’re in and purpose of the loan when evaluating the cost-effectiveness of each type of financing. 

Which options is cheaper will hinge on a few different factors: 

Loan Duration 

Bridging loans are intended to be short-term loans (maximum is usually 12 months). Their term normally ranges from a few to multiple months before you repay them, whereas personal loans often have much longer repayment periods, extending from months to even years.  

The shorter duration of a bridging loan’s repayment period means the total interest paid over the loan term may be lower, at least in comparison to a longer-term personal loan, despite the higher interest rate. 

Urgency and Convenience 

Bridging loans are designed to get you through periods of urgent financial need. Therefore, they can be obtained quickly, often with streamlined application processes to boot. This does, of course, cost money in interest. 

Personal loans on the other hand may take longer to process, which might not be suitable if you require access to immediate cash. 

Collateral Requirement 

Bridging loans require you to offer the lender some sort of collateral, such as property. Conversely, personal loans are unsecured.  

If you don't have any valuable assets to put up as part of the arrangement, a personal loan may be the only option available to you. 

Credit History and Eligibility 

Personal loans generally have much stricter eligibility criteria and may require a stronger credit history compared to bridging loans.  

If you have a less-than-perfect credit score or even short-term credit history, you may find it easier to qualify for a bridging loan, providing you’ve got the asset to secure it with. 

This is because they’re not calculated based on your income or ability to afford regular repayments, they’re calculated on your ability to repay via a lump sum, either by selling another property or refinancing, for example. 

Purpose of the Loan 

Bridging loans are specifically designed for short-term financial gaps during property transactions, although they can be used to alternative costs. 

Conversely, personal loans can be used for a wide variety of purposes and at your discretion. 

If you can’t account for what each penny of the funding will be spent on in advance of your receipt of the loan, it may be better to opt for a personal loan. 

Are there any pitfalls to a bridging loan? 

If you’ve researched personal finance before, you’ll know that everything has its pitfalls. 

One of the primary disadvantages of bridging loans is the higher interest rates they typically carry.  

Because they’re only designed for short-term use and often involve higher risk for lenders, the interest rates can be considerably higher compared to traditional long-term loans you may find elsewhere on the market.  

For this reason, you need to carefully assess the affordability of the loan before taking the plunge. 

Another potential pitfall you may identify is the short repayment period associated with bridging loans.  

These loans are specially designed to be repaid quickly, usually within 12-18 months at a maximum.  

If you encounter any unexpected delays in the transaction the loan pertains to or run into unavoidable challenges in selling a property or securing long-term financing, you might struggle to repay the loan within the agreed-upon timeframe.  

Unfortunately, even though it may not be your fault, this can lead to additional costs, penalties, or the need to seek an extension on the loan (which may or may not be approved).  

Depending on the flexibility of the lender, this could potentially add further financial strain to an otherwise sticky situation. 

Lastly, the risk of overestimating the value of the property at hand, or even underestimating the time required to sell or refinance, can sometimes lead to serious financial difficulties on your part.  

You should conduct thorough research, seek professional valuations, and realistically assess the market conditions to cover yourself in advance of taking out a loan.  

This will help you avoid the undesirable situation where you borrow more than the property can support or miscalculate the time you need to repay the loan.  

Failing to take this simple but essential step could result in a shortfall when it comes to repaying the loan, potentially causing distress and impacting your credit score in the long run.