What is a Bridging Loan?
A bridging loan is a popular option for anyone looking to borrow money for a short time. One of the most popular uses for this type of loan is when someone is looking to buy or develop properties. Developers are looking increasingly towards bridging loans as a replacement for development finance as they can be quicker to process which allows developers to work on and complete sites much quicker.
Bridging loans can also work for individuals where perhaps the sale of their old house has not completed, but for whatever reason, the borrower needs to move into their new property due to a contractual obligation. In this instance, the homeowner could take out a bridging loan to cover the additional costs on both properties until their original home is sold. Once they receive the money for their old home, they would pay off the bridging loan.
How Do Bridging Loans Work?
If you are making inquiries about taking out a bridging loan, you may come across the terminology of closed and open.
A Closed Bridging Loan
As the name suggests, a closed bridge loan has a fixed end date. This could be offered when contracts for the original property sale have been exchanged but not completed. There is usually an agreed completion date at the point of exchange, so the closed bridging loan could be agreed to coincide with the exchange of contracts. When the sale of the first property completes, the bridging loan becomes due.
An Open Bridging Loan
An open bridging loan differs from a closed bridging loan because there is no fixed end date. However, in the vast majority of cases, there is an expectation that the loan will be repaid within one calendar year. As with most forms of credit, before a bridging loan is agreed upon, a lender will want to see some evidence or strategy as to how the loan will be repaid. In most cases, this will be through sale of a property, or a new funding source such as a mortgage being secured. We always advise our clients to have some type of backup strategy in place in case circumstances change. After all, there is always a possibility that the sale of any property can fall through, and bridging loans tend to be more expensive than traditional loans.
First Charge Bridging Loans
When you borrow money via a bridging loan, this is known as a secured loan. The reason for this is that the money borrowed is secured against the value of the property. If the borrower owns their property in full, then the bridging loan provider would have a first charge loan on the property. This essentially means that if the loan is not repaid, then the property would be sold, and the lender would be first one to receive payment from the proceeds to settle the debt.
Second Charge Bridging Loans
In the above circumstances where there is still an outstanding mortgage / charge on the property, then the original provider of the funding would typically have the first charge on the property. The provider of the bridging loan would have the second charge. This means that if the property were sold to repay the debt, the original lender would receive their money first, with the bridge loan provider second in the queue.
Although bridging loans might seem a relatively complicated financial product, they are an excellent short-term solution for specific situations. The Team at AW Capital has arranged hundreds of bridging loans over the years and has the knowledge and expertise to assist their clients in securing a bridging loan, enabling them to secure the property of their dreams.
If you are considering taking out a bridging loan, and wish to discuss the options available, contact our friendly customer service team today.