What are the pros and cons of bridging finance?

Unlike a standard bank loan, bridging finance loans are a form of short-term property finance.

Bridging finance loans are usually offered for up to eighteen months, with the loan repayable in full at the end of the term. Furthermore, monthly interest is incorporated into the loan, so no repayments need to be made throughout the course of the loan.

Bridging finance can be used for a variety of reasons, such as:

✓ Buying a property quickly (e.g. auction purchases)
✓ Purchasing uninhabitable or restoration
✓ Repossession prevention
✓ Buying property under market value
✓ The pros and cons of bridging loans

While bridging loans are useful when arranging finance, they can pose more of a risk than other forms of finance. Therefore, it is worth researching their pros and cons before you commit to a loan.

What are the pros of bridging finance?

First, bridging loans can be arranged quickly, and in some cases completed in a matter of hours. Therefore, they are ideal should you need to raise funds quickly. Likewise, as there are often no monthly repayments, bridging loans can be used to raise money where funds are low.

Another benefit is that bridging loans are flexible and can be paid off as soon as you’re able to. Should you opt to retain monthly interest, you also won't need to pay interest until your whole loan is repaid.

Finally, bridging loans can be used to purchase properties that would otherwise be inapplicable for other types of borrowing, such as property that is not habitable.

What are the cons of bridging finance?

First, the high interest rates. Typically, you would pay 1-1.5% a month in interest for an open bridge, compared to mortgage rates of 5% APR. Although rates are dropping, it's clear that standard mortgages remain the most economical option for most property transactions.

Second, fees for bridging loans can be expensive. Usually, you will pay a 1.5% fee that is taken out of the loan. Not only that, there may be broker, valuation and legal fees to consider as well.

Finally, as most loans are short term, if you struggle with your method of repayment, you could encounter some problems. Failure to repay the bridging loan would eventually lead to repossession.

Please click here to find out more about bridging finance with Vincent Burch.