In simple terms, a bridging loan is a short-term secured loan which can be used for any legal purpose. Bridging finance is typically issued over a period of no longer than 18 months, and can take as little as a few working days to arrange.
Why is the interest rate on a bridging loan higher than a standard mortgage?
With bridging finance, interest applies on a monthly basis due to the short-term nature of the facility. Bridging loans are repaid within a matter of months (not years), so it is necessary for the equivalent APR to be higher than that of a standard mortgage.
Repaid promptly, a bridging loan can represent unbeatable value for money – monthly interest can be as low as 0.5% per month.
How do I pay the interest due on my loan?
Repayment terms and conditions are negotiated during the application process, in accordance with the borrower’s preferences. There are two main options for repaying the interest on a bridging loan, as follows:
- Paying monthly – the borrower covers the interest with monthly payments throughout the loan term, before repaying the loan balance on the agreed date.
- Rolled up interest – all interest payments are added to the total balance of the loan each month, and repaid with the full balance of the loan is repaid.
The second option is often the preferable choice for borrowers, as it provides them with a period of time during which they have no repayment obligations whatsoever.
When do I have to repay the loan?
A repayment date (or redemption/deadline date) will be agreed between the lender and the borrower as part of the application process. Bridging finance is flexible, enabling applicants to choose terms ranging from a few weeks to two years.
Early repayment is usually an option, which unlike a conventional mortgage will not typically result in excessive fees and penalties. Discuss the possibility of early repayment with your lender before signing your loan agreement, if you would like the opportunity to pay off your debt early and save money.
What happens if I am not able to repay my loan at the agreed time?
In most instances, lenders will make every effort to accommodate those who run into difficulties along the way. An extension on the original loan term may be offered, giving the borrower more time to come up with the money needed to repay the loan.
However, late payments and defaults on bridging loans will almost always result in additional fees, interest charges and penalties. Contact your lender at the earliest possible stage, if you are concerned about your capacity to repay your loan.
What if I already have a mortgage on my property?
Bridging finance can be issued as a second charge or even a third charge loan, secured against a property that already has a mortgage secured against it. Borrowing against a mortgaged property is only possible where the applicant has sufficient equity in their assets to cover the full costs of the loan.
Second and third charge bridging loans are typically charged at a higher rate than first charge bridging loans, due to the additional risk taken on by the lender.
Can I change my mind and cancel the loan?
Your rights to cancel a bridging loan are the same as those that apply when taking out any other type of loan or mortgage. You are under no formal or legal obligation to go ahead, until the moment you sign the final loan agreement, and the transaction is finalised.
At which point, backing out of the agreement will render you liable for all applicable fees and penalty payments outlined in the terms and conditions of the contract.
