What Are Bridging Loans?
A bridge loan is a short-term funding option – it works by ‘bridging the gap’ between the period in which an existing property is sold and a new property is purchased.
Typically, a short-term loan is taken out against the value of the borrower’s current property to purchase a new property.
Bridging loans can be used to pay off all existing loans, with the excess going towards the down payment for a new property; or, alternatively can be opened as a second mortgage and used exclusively as a down payment for a new property.
Why Use a Bridging Loan?
Borrowers may opt for bridging loans depending on their individual situation – it may be a short-term loan used in pressing circumstances, or it may be useful at auctions where buyers need to put down a deposit almost immediately. They are also used in property investment, buy-to-let and development.
When the property market is booming and houses are selling quickly, consumers do not typically opt for bridging loans; however, if a property is taking a long time to sell, a bridging loan may be a tempting offer.
What Are the Risks?
Although bridging loans may sound tempting, the Financial Conduct Authority (FCA) advises borrowers to be cautious and not take out these types of loans too readily, as they are generally much more expensive than mainstream loans with high interest rates, there may also be hefty administrative and legal fees which may be complicated.
Bridging loans are not a long-term option – closed bridging loans have a fixed repayment date, generally within six months. Open loans have no fixed repayment date, but are usually expected to be repaid within a year.
There are many different types of bridging loans available, if you are considering taking one out, be sure to evaluate all offers to find a deal to suit your circumstances, as well as thoroughly researching the current market.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR OTHER LOAN SECURED ON IT.
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