Bridging Loan and Its Purposes

A bridging loan fund the house expenses and other properties using replacement financing. A bridging loan usually covers the gap between the date you complete your property transaction and when you first receive monies from your primary mortgage or any other standard financial product.

Bridging loans are short-term loans, which must repay the borrowed sums on the date when the repayment of any other credit ceases. For example, early end mortgage or earlier house sell and purchase transactions.

Bridging Loan Comparison:

Bridging finance is usually cheaper than standard financial products. However, there can be extra fees; these include legal costs and survey/valuation costs. Usually, the borrower provides proof that he has already secured a new property and agrees to put forward monies through a deposit on this unique property.

Advantages and disadvantages;  one may determine which direction to face if he wants to use such type of product to finance his future business plans.

Bridging loans, in comparison to most other types of loans, are short-term. They usually have a lending period between 6 weeks and 12 months. However, there may be circumstances where the bridging loan lenders has agreed to provide more extended than 12 months or shorter than six weeks.

The amount borrowed through this type of finance usually is very high; it varies from £25,000 to £50 million. Borrowers pay all fees when property is fully sold. This can reduce borrower’s risk. The interest rates on these loans can range from 3% per month (36% p.a.) up to 29% per annum (annualised).

Who Can Use Bridging Loan:

Developers, investors, or owner-occupiers usually use Bridging loans to receive the principal sum in advance. The problem is that there are no restrictions on which type of borrower can apply for this product. Because of that, borrowers may be tempted to use it for unauthorised reasons. Some argue that bridging finance should only be allowed to buy new homes and purchase existing properties. Others think it should be abolished altogether since its main function is to act as a loophole within the financial system.

Bridging loans are not just used by high-net-worth individuals or businesses; these types of finance makes up about 10% of all mortgages currently in operation.

There are many reasons to use this finance. It may be used as a solution to their urgent cash flow problems. It can also be used for taking advantage of short-term variations in the interest rate and house prices. Sometimes this product is called “flexible mortgage” – it allows total freedom regarding its planning and use. For example, suppose someone wants to buy a property worth £600,000 but doesn’t have enough funds. In that case, they may use a bridging loan (by applying for it) and borrow £500,000, which will cover his deposit on the new property plus part of the purchase price; at the end of 6 months, when the borrower has received a total amount of money he will repay the bridging loan.

Pros and Cons of Bridging Loan:

There are some pros and cons of using bridging finance; it is essential to consider them before deciding which affects the borrower’s financial future.

pros and cons of bridging loanBridging loans can be beneficial because they provide borrowers with an immediate source of the borrowed money, helping them to meet short-term cash flow requirements at a critical time or purchase properties without having sufficient funds in their bank account. They also provide flexibility that other forms of finance may not be able to offer at the time. For example, if someone decides to buy a property worth £1 million but doesn’t have sufficient funds to do so – he will be able to borrow all necessary amount within a few days and repay it as soon as the buyer has received total funds.

However, because bridging loans are short-term and have high-interest rates, it is clear that they can be costly for borrowers. Some products have an annual percentage rate of 36% per annum (this means that if you borrow £50,000 on a 12-month bridging loan with a 29% APR. £3,000 interest rate is required.  In addition, this type of finance has been described as “a nightmare”. Some say it should only be used for short-term requirements while others claim it should be abolished altogether.

What is Bridging Loan For?

Bridging loans are suitable only for short-term borrowing needs, so many people consider them to be “expensive”. It is better to avoid taking this type of finance if possible. Because borrowers often have problems with repaying these loans – high-interest rates can cause bigger financial problems in future (if you borrowed £100,000 on 12 months bridging loan at 29% APR you would end up paying £29,000 in interest alone).

bridging loanYou should carefully analyse your current situation before deciding whether or not to apply for this product; it is very important that the borrower has enough money now to repay his loan back once he has bought a new property. Borrowers must pay all fees; this means that he will pay more than the borrowed money. There is no guarantee for a borrower that the company will accept his application and give him a loan (even if he has sufficient funds to repay it).

“Bridging loans should be used with caution and only as necessary.”

The interest rate of bridging loans can cause borrowers to encounter financial problems in future. Because these loans are short-term, so borrowers need to repay them quickly, which leads to high levels of interest fees.

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