Bridging loans are a type of finance that has gained serious traction in recent years. It is incredibly flexible, offering borrowers vast sums of capital in a short space of time. For this reason, it’s no surprise that bridging loans are the go-to for property developers and individuals that can’t get a traditional mortgage. However, despite the recent rise in use, bridging loans still remain an unknown quantity to many. How long bridging loans last is a common question, one that we seek to answer.
In this article, we will break down bridging loans, how they work, and outline how long the typical bridging loan lasts. Let’s get started.
What is a bridging loan?
A bridging loan can be compared to its namesake. It is a type of finance that allows borrowers to bridge the gap between the purchase of an asset and a long-term method of finance. It is, therefore, a short-term loan in nature, acting more as a stop-gap measure than anything else.
Bridging loans are categorised as a form of secured loan. This means they require assets to be used as collateral during the agreement. Because of this, bridging loans can be used to raise large sums of money indeed. The value of assets being used as collateral is the most important factor, and directly influences the overall value of the loan. High-value assets can be used to take out high-value bridging loans. To the tune of millions if you have assets of sufficient value. This, combined with the speed and flexibility of bridging loans, is why they are so widely used in property development.
While bridging loans have considerable flexibility and the capacity to raise large sums of capital, these perks do come at a cost. Namely, there is some risk to using bridging loans, given that they require the use of assets as collateral. While these assets certainly can be leveraged to raise a hefty loan, the larger sums constitute larger risks. Failing to repay your bridging loan can lead to your lender seizing the assets used as collateral as a form of repayment. As such, a level of caution should be exercised when using bridging finance.
How do bridging loans work?
Bridging loans are available to both private individuals and commercial entities. As they are considered secured loans, bridging loans will be treated as first or second-charge loans once taken out. This means that it will take precedence over other loans. So, you will be expected to make repayments to your bridging loan before any other lenders you may have.
Bridging loans are an excellent solution for borrowers that cannot, for whatever reason, obtain a traditional loan. They work by allowing homeowners to leverage the equity they have in their homes to raise finance. If their application is approved, borrowers can expect to receive their cash in as little as 48 hours. Though the precise time depends on specific lenders. This finance can then be used to make a substantial deposit on a property. Or, in some cases, make an outright cash offer.
Naturally, this makes the offer incredibly appealing from the perspective of a property seller, and often puts bridging loan borrowers at the front of the queue. However, bridging loan lenders will place a lien on assets used as collateral, property, in this context. In short, this lien legally entitles the lender to seize the property in the event the borrower defaults on the debt. Naturally, this constitutes a significant risk to the financially unstable, as we have mentioned.
As bridging loans are quick and limited primarily by the value of collateral assets, they can be used to seize upon brief opportunities that emerge in the property market. Buyers can comfortably make an offer without waiting for their old property to sell. Completely removing the risk of a chain break that plagues all prospective homebuyers. Once the old property sells, the proceeds can be used to pay back the bridging loan. Alternatively, a long-term method of finance can be sought, used to pay back the bridging loan, and repaid over its course as normal.
How long do bridging loans last?
As we have mentioned, bridging loans are a short-term form of finance. The average bridging loan term lasts between six to twelve months. Though the exact timeframe of any given bridging loan depends on the lender. This makes bridging loans an appropriate solution for brief opportunities that require swift action, though are taken by a borrower confident in their abilities to make other arrangements in a short space of time. For other purposes, this financial half-life can be more than restrictive, occasionally even being detrimental to the unprepared borrower. In such cases, it is better to use alternative methods.
Alternatives to bridging finance
While bridging loans are remarkably useful, particularly for purchasing property, there are times when they are not the most appropriate solution. Here are a few examples of good alternatives to bridging finance.
Personal loans
For smaller projects, such as the refurbishment of a property, personal loans can be a good solution. These loans are of much lesser value than bridging loans, and can be either secured or unsecured. However, personal loans do require a strong credit rating, a requirement bridging loans do not have.
HELOC
A HELOC, or Home Equity Line of Credit, is another alternative to bridging loans. It allows you to tap into the equity you have in your home. Rather than secure the loan against your home equity, more akin to bridging loans, a HELOC works similarly to a credit card. With one, you will be able to draw from your line of credit as needed, and only make repayments as appropriate. This makes the use cases for HELOCs quite varied, though not quite as flexible as bridging loans.
Wrapping up
All in all, bridging loans can be an excellent method of raising the capital required to purchase property. It is flexible, provides fast access to finance, and boasts a swift and straightforward application process. However, it isn’t without disadvantages. Bridging loans have a comparatively high level of risk, and even for the most financially stable, interest rates can be quite high. As such, it is advisable to carefully consider the needs of your situation before taking action.