A bridging loan is a flexible, short-term loan usually secured against property where the borrower agrees to pay back the loan plus interest by an agreed date.
Bridges are typically used to provide finance for property purchases while a borrower is awaiting the completion of a contingent sale of an existing property, or simply where other finance is scarce - especially pertinent since the onset of the financial crisis.
The repayment term can be tailored to meet the individual borrower’s needs, but most bridging loans have a repayment term of less than 12 months. Other security which may be considered in addition to the principal property, if it does not offer sufficient security on its own, includes corporate and personal guarantees.
Since bridging loans are usually offered on the basis of the security and the proposed exit rather than the borrower’s ability to meet regular repayments, bridging can assist in a wide variety of situations.
Historically the most common form of bridging loan, the “classic bridge”, has been used to facilitating a purchase before the sale of another property, an extremely useful tool for downsizers. However it is also now proving a useful tool for property developers as well as business people and investors.
Danny Waters, chief executive of Enterprise Finance, says bridging loans are typically more expensive than standard loans but that prices had fallen post-financial crash from a previousy rate of typically 1.5 per cent per month to anywhere as low as half that.
Mark Posniak, head of sales and marketing for Dragonfly Property Finance, says Bridging loans can pretty much be used for anything as long as the lender is happy with the security and the ‘exit’, which is how they get repaid.
He adds that within a 12-month period the borrower will then pay off the bridging loan, usually by refinancing through a conventional lender or receiving funds from another source.
The most common exit strategy is a remortgage through a high street lender, according to Danny Waters, chief executive of Enterprise Finance, but the sale of the property could also constitute an exit.
