What’s it for?
Bridging loans tend to mostly be used for commercial property purchases, but they can be used for residential property as well. Essentially, they bridge the gap between the due date of the money you owe and the date you manage to secure longer-term finance.
Let’s say you see some great commercial property that’s up for auction. You don’t have the time to get long-term financing in place, so you apply for a bridging loan. The loan gives you the cash you need to acquire the property and covers you until you get a mortgage for it.
Another example would be for property development. Let’s say you buy a piece of land which you plan to build a few houses on. You could use a bridging loan to get the funds you need to start the development. Once the work’s complete, you can pay the loan off with the money you make from selling the houses.
This is sometimes called property development finance and usually works in stages – a lender will loan you chunks of money when you get to different stages in the development. For example, they might loan you £100,000 to buy the land, then loan you another £100,000 to lay the foundations, and then another £100,000 to start the development, and so on until the job’s complete.
What should I be aware of?
When compared to long-term loans, bridging finance can seem quite expensive. That’s because it’s meant to be paid off quickly – bridging loans usually last only six to 12 months. Compare the APR for a mortgage and a bridging loan, for example, and the bridging loan will be much higher.
Before taking out a bridging loan, make sure you’re confident you’ll be able to get the capital you need to pay it off quickly.
They also tend to come with quite high administrative costs – both for taking the loan out in the first place and an exit fee. So make sure you factor that into your calculations.