Bridging loans are becoming increasingly important in the UK, providing borrowers with fast access to capital and enabling them to take advantage of limited time opportunities. While navigating the world of UK bridging loans can be tricky, the services of a skilled bridging finance broker can be crucial in ensuring a successful application. This article will define bridging loans, explain how they work in the UK and why they are important in London.
What is a bridging loan?
Bridging loans are an important tool in the world of debt finance, enabling borrowers’ fast access to capital in order to take advantage of limited time opportunities. While bridging loans can be used for a number of different reasons, they are becoming increasingly popular in the world of property finance. At present, there are hundreds, if not thousands, of real estate bridging lenders in the UK, each offering their own specialist products. While each lender will have their own lending criteria, and their products will likely differ from each other in some or other way, there are generally some standard characteristics of bridging loans that are important to understand:
Term: Bridging loans differ from traditional mortgage finance in that their terms are generally much shorter. Where traditional residential mortgages often last upwards of 20 years, bridging loans are designed to cater for short term property financing needs. In fact, it is common for bridging loans to last between 0 and 24 months, although some lenders will lend up to 36 months). As a result of this, bridging loans are a popular alternative to a long-term traditional mortgage, enabling the borrower to repay the facility in a matter of months.
Repayment: Another important differentiating factor between bridging loans and traditional mortgages is the way in which they are repaid. Where traditional mortgages are repaid slowly, over time, through regular smaller payments, bridging loans are generally repaid in one lump sum payment at the end of the loan term.
Interest Rate: Interest rates are one of the most important factors to consider when comparing loan options as they have a direct impact on the cost of the facility. Where traditional mortgage finance is one of the cheapest forms of property finance available, bridging loans come at a much higher cost, with rates often exceeding 1% per month. With this in mind, it is important to understand that bridging loans are not a long-term finance solution and should only be used for short term requirements.
Exit Strategy: When evaluating a bridging loan application, bridging lenders will place a great deal of importance on the borrower’s exist strategy. Generally, bridging loans will be repaid upon the occurrence of a predefined event, such as the sale of a property or the completion of a long-term loan application. With this in mind, it is crucial that borrowers ensure that they have a clear exit strategy in place prior to applying for a bridging loan, as this will be heavily scrutinised by the lender.
How do bridging loans work in the UK?
Bridging loans are a well-established form of property finance in the UK, offering borrowers fast access to capital. Where traditional property finance is offered by high street banks, bridging finance is generally offered by specialist lenders and private individuals, making it a widely accessible form of finance. Moreover, given the shear number of bridging finance lenders, borrowers will generally make use of a bridging finance broker when applying for bridging finance. UK bridging finance brokers are equipped with the necessary market knowledge and experience to guide their clients to the right facility for their needs.
Why are bridging loans important in London?
Bridging Loans are a crucial part of the London property market for a number of reasons. Perhaps the most important reason is the fact that the London property market moves quickly, with some properties only spending days on the market. The fierce competition between buyers and sellers means that buyers often do not have the time to wait for their mortgage application to be approved and need fast access to capital.
In conclusion, the speed at which properties are bought and sold in the UK, and specifically London, have contributed to a booming bridging loan industry. By providing borrowers the fast access to capital they need, bridging loans are crucial in ensuring the London property market operates efficiently.