A bridge to success? The pros and cons of bridging loans

Zoe Smith, Head of Commercial Property at ORJ, discusses the strengths and weaknesses of bridging loans.

Commercial bridging loans are very popular at the moment due to the turbulent economy and difficult mortgage market – and they can be a useful way of raising funds in the short term.

Bridging loans are usually used to bridge the gap between the purchase of a new property and the sale of an existing one. In this instance, they are an effective way to acquire funds quickly before arranging a mortgage at a later date.

The loans can also be a bit more flexible and tailored in comparison to what is available on the high street, which is often formulaic and a tick box exercise.

Bridging loans can also be useful for more unusual purchase circumstances, such as buying a property where a lot of work needs to be done. I had a client recently who used a sizeable bridging loan to purchase a commercial building, renovate it and sell it. They would’ve found it very difficult to buy the property using a ‘normal’ mortgage.

There are, of course, negatives to bridging loans and things to be aware of.

Firstly, bridging loans usually come with higher interest rates than traditional mortgages – and interest is typically charged on a monthly basis. For that reason, it is generally wise to only use bridging loans as a short-term fix.

Repayment periods are usually short, too, so borrowers should be absolutely sure they can satisfy the loan within the allotted time. Failure to do so can lead to additional fees and penalties. Always have an exit plan in place, as well a contingency should that back-up strategy fail.

Bridging loans are usually secured against the property being purchased. Therefore, failure to meet the terms of the loan could result in the lender seizing the property and damage to your credit score. Personal guarantees may also be required, with cars and houses often charged against the loan.

Finally, bridging loans can be simple and straightforward, but they can also be more time intensive to set up when being used to purchase property due to the number of enquiries from the lender.

As with all major financial and legal decisions, expert advice is highly advisable. At ORJ, we have strong experience with the nuances and complexities of bridging loans. We can advise on the loan as well as dealing with all of the enquiries in a professional and effective manner when using the funds to buy property.

It is also important to use a reliable broker – and we can recommend local operators that can be trusted.

Get in touch today to talk with our expert team. Email team@orj.co.uk or call 01785 223440.