Bridging Finance, also known as a bridging loan, is a temporary loan designed to "bridge the gap" between the purchase of a new asset and the availability of funds from the sale of an existing one.
Bridging loans are frequently utilised by individuals looking to purchase a new home before selling their existing one. Landlords, homeowners, and property investors use them for purposes such as:
- Acquiring property.
- Property development.
- Investing in buy-to-let opportunities.
- Managing tax payments.
Types of Bridging finance
Open Bridging Loans
These loans do not have a set repayment date, allowing you to repay them whenever your funds become available. Typically, lenders expect the debt to be cleared within a year, though some may offer longer repayment terms.
Closed Bridging Loans
These loans have a fixed repayment date, usually aligned with the expected availability of your funds (such as the completion of a house sale). Closed bridging loans are generally less expensive than open bridging loans due to their more rigid repayment structure.
Regardless of the type of bridging loan you choose, lenders will require information on your repayment plan, often referred to as an ‘exit plan’ (e.g., proceeds from a property sale). When you take out a bridging loan, the lender will place a ‘charge’ on your property. This means that if you fail to repay the loan, the lender will recover the repayment from the sale of the property.
If there are no other loans secured against your property (for example, if you own it outright), it will be a ‘first charge’ bridging loan. In this case, if you fail to repay the loan and your property is sold to cover the debt, the bridging loan lender will be repaid first.
If you already have one or more loans secured on the property (such as a mortgage), it will be a ‘second charge’ bridging loan. In this scenario, if you fail to repay the bridging loan and your property is sold to cover the debt, the bridging loan lender will be repaid after your mortgage provider. Second charge loans are usually more expensive than first charge loans because there is a higher risk that the second charge lender won’t recover their money if you cannot keep up with repayments. Additionally, a second charge loan requires consent from the first charge lender, typically your mortgage provider.
