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Short Term Bridge Loans Explained
Bridging loans, unlike mortgages, are designed to facilitate short-term borrowing – this is where the name "bridge loan" comes from.
Its function is to bridge a financial gap for borrowers who need quick access to funds and those looking for a more flexible product than a traditional mortgage.
The short-term market is vast, with many different lenders offering different types of bridge loans – these are often tailored to specific scenarios, which borrowers are looking to resolve through the bridging.
Because bridge loans are short-term, and require repayment in a relevantly short period, many people are apprehensive about bridge loans or have some confusion surrounding the concept.
Here, we aim to dispel concerns and answer questions on how exactly short-term bridge loans work - what they can be used for, the scenarios in which bridging is most common, how you might be able to get a bridge loan for your purposes, and, most importantly, if it's the right financial move for you.
Written by: Sam O'Neill & Sam Hodgson
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Why would you get a short term bridge loan?
What are the uses of short term bridge loans?
What's the advantage of a bridge loan?
How long does it take to arrange a bridge loan?
What types of bridging loans are there?
What is the interest on a bridging loan?
Need advice with short term bridge loans?
Why would you get a short term bridge loan?
There are many reasons why someone would need a bridge loan. Regardless of the details, if you're in a position where a financial gap needs to be bridged through lending, then a bridge loan is the right option for you.
However, the most common use for a bridge loan is for property purchases – typically residential property – while awaiting the sale of a previous property.
A bridge loan allows borrowers to transact on the market without waiting for their old property to sell. It gives them the funds they need while having the exit strategy for the loan in place through the eventual sale of their old property, to be repaid later.
This function of bridge loans can be utilised in both downsizing and upsizing your property or chain breaking – in which a buyer has pulled out of a purchase, leaving you stranded.
Sam O'Neill
Head of Bridging
Let us do all the hard work of finding the right bridging lender for your circumstances.
We secure bridging finance for applications of all types, and we negotiate competitive lending to meet your needs and timescale.
What are the uses of short term bridge loans?
As we have explained, bridge loans are not only useful for one kind of scenario; they apply to many. Here are some examples of scenarios in which short term bridge loans can be helpful for borrowers:
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Property development– a property development bridge loan could be used to fund extensive renovations, or light/heavy refurbishments, on an existing property. It can be used for a self-build project or even to purchase land to build on. A bridge loan for property development can also finance unmortgageable properties, which would otherwise be ineligible for financing.
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Emergency finance – If you are facing a scenario in which an elderly relative needs to go into a care home or emergency medical expenses must be dealt with, then a bridge loan can help. Fast financing for unpredicted scenarios can get you out of a tricky spot and give you some breathing room financially.
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Business – A bridge loan can be taken out for business purposes for purchasing new premises, a deposit, a property portfolio purchase, or just business growth in general – whether equipment or machinery etc., need to be funded.
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Auction bridging loans – properties bought at auction have strict payment deadlines, which can make financing through traditional means impossible – usually within 28 days. A bridge loan can facilitate this type of purchase, as bridge loans can be organised very quickly.
This is a partial list of the possible uses of short-term bridge loans; you can find more specific information on our full guide to bridging loans here.
What's the advantage of a bridge loan?
In every circumstance, a borrower might need a bridge loan – two aspects are always the same in terms of why a bridge loan is the most advantageous option:
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Speed – Bridge loans can often be organised in as little as a week, depending on the case's complexity. This makes them a perfect alternative for those needing solutions quickly and with funds in their pocket as soon as possible.
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Flexibility – Bridge loans offer unrivalled flexibility for borrowers' purposes, flexibility that you wouldn't get with traditional finance methods such as a mortgage. With the help of a bridging loan expert, you can secure a bridge loan tailored to your circumstances.
Additionally, there are many lenders out there offering different products suited to all types of scenarios. As we have mentioned, the short-term market is vast, and plenty of lenders are willing to facilitate loans.
The advantage to this is that, with the help of a bridging loan broker, you can find the right lender for your needs and quickly secure the type of finance you're looking for, for whatever your purposes are.
Watch our video below to learn how a short term bridging loan can be used to fix a broken property chain:
How long does it take to arrange a bridging loan?
The speed at which a short-term bridge loan can be organised can depend on several factors. It can be challenging to approach bridge loan financing alone.
For the best results, you'll want the help of an expert to guide you through the entire process; a broker who can approach lenders on your behalf, liaise with solicitors, and chase up your application.
With a broker's help, a bridge loan can be organised very quickly – often within a week – but this can depend on the complexity of your circumstance.
What types of bridging loans are there?
In your research of short-term bridge loans, you encountered a lot of different terminologies used for different types of bridge loans, such as open and closed bridge loans or regulated and unregulated loans. Here's the difference between those terms and what they are referring to:
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Regulated and unregulated – regulated loans are those regulated by the FCA (Financial conduct authority), which meet a standard of protection for borrowers. In contrast, unregulated loans do not have the same protection. The main difference is in which type of property the loan is used for; regulated loans are for residential property, while unregulated loans are for commercial property.
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Open and closed bridge loans – The difference between open and closed loans is simply the term of the repayment period. With open loans, the typical term is within one or two years, and with closed loans, the repayment period is set by the lender at a fixed date.
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First charge and Second charge bridge loans – When a bridge loan is taken out on a property, a charge is applied to that security – the charge indicates which lenders are repaid first if a loan is not repaid. For instance, if you have a mortgage on a property, this will equate to a first charge, and if you take a bridge loan out against that property, it will be a second-charge bridge loan.
What is the interest on a bridging loan?
The interest rates for bridge loans are more expensive than mortgages due to the short-term nature of bridge loans, as they are designed to be paid in under a year in most cases, while a long-term mortgage is paid over 25-30 years.
When it comes to rates, this can differ from lender to lender. However, interest is usually set at a monthly rate instead of an annual one. The bridge loan interest is only sometimes paid monthly either; you'll have some options for the repayment method.
This will be dependent on the lender, but most bridge loans come with three options:
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Monthly interest payments – this is the standard way to repay interest on a loan, with fixed monthly payments due throughout the term.
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Rolled-up interest – With rolled-up interest, the borrower does not need to make monthly interest payments but will repay the total loan amount plus accrued interest at the end of the loan term.
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Retained interest – Retained interest is similar to rolled-up interest. Still, instead of adding the interest to the loan amount, it is deducted from the loan amount at the outset instead.
Are bridge loans risky?
All types of loans come with some inherent risk – so it is always best to speak with a financial advisor on the best course of action and if a short-term loan such as a bridge loan is a wise move.
Bridge loans are also more expensive than traditional borrowing; interest rates are higher – which reflects risk mitigation on the lender's behalf, as lenders will need some assurances as to whether a borrower can sufficiently repay a loan.
Because of this, borrowers must have a clear exit strategy in place – with all their costs accounted for – and ensure that terms are understood entirely from the outset.
If you're looking for some help, you can read our guide on finding the best bridging loan – which may help determine the specifics of whether a bridge loan is a suitable option for you and how we at Clifton Private Finance can help you find the best deal.
Need advice with short term bridging loans?
Here at Clifton Private Finance, we can help guide you through your options, whether you're new to bridging loans or are more experienced with this type of financing.
Let us do all the hard work of finding the right bridging lender for your circumstances. We secure bridging finance for applications of all types, and we negotiate competitive lending to meet your needs and timescale.
Sam O'Neill
Head of Bridging
When making any significant financial decision, such as a short-term loan, it's always best to seek the help of a bridging loan expert. This will ensure you're getting finance at an affordable and favourable rate.
Call us today on 0117 959 5094 to see how we can help, or book a consultation with us below.
FAQs
What is the shortest term loan?
Typically, bridge loans span a 12-month term – for open bridge loans. This is the shortest term for a bridge loan; other shorter-term loans are not comparable to bridge loans.
Which banks offer bridging finance?
UK banks no longer offer bridge loans in the same manner they used. Currently, bridge loans are only available through private or specialist lenders who provide a wide range of products that can be sought out through the help of a bridging expert.
Do you need proof of income for a bridging loan?
This can depend on the lender's criteria; if it's a larger loan, you may need to provide additional details to satisfy a lender. Typically, proof of income will be required when applying for a bridge loan.
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