Pros and cons of bridging finance

Bridging finance in the UK is increasing in popularity, day by day. This is because traditional mortgage options may not always align with your timeline and financial needs. Especially in cases where an individual is trying to purchase a new property before they have sold their current home, traditional mortgage options may not be able to provide the required speed and flexibility. In order to ‘bridge this gap’, buyers usually turn to bridging finance.

Through bridging finance, buyers can borrow money for a short duration, typically less than a year. However, bridging finance may not be the right choice for everyone. In this guide, we will explore the pros and cons of bridging finance to help you make an informed decision.

The Pros

Speed

The most important advantage of bridging finance is its speed, especially when compared to traditional mortgage options. While traditional options may take months to process, bridging loans canbe approved and funded within a matter of weeks. If you work with a bridge loan broker, the process can be completed in a few days.

Flexibility

Bridging loans are also very flexible, making them useful for different situations. Whether you are buying a new property, refurbishing an existing one, or have any other requirements, you can take abridging loan as per your needs.

Accessibility

Bridging loan lenders are usually more concerned with the value of the property and your plan to repay the loan than your credit history. This makes bridging finance an accessible short term option for those with less-than-perfect credit whilst their credit improves.

Lesser Monthly Payments

With bridging loans, your monthly payments only consist of interest payments which can be added to the loan so you are not having o service the monthly payment. This results in a better monthly cashflow whilst you secure more longer term funding.

Bridging to Secure Better Terms

Bridging finance can work as a bridge to secure more favourable long-term financing. For example, you can use a bridging loan to purchase a property quickly or to renovate a property to make it mortgageable. You can then look for a traditional mortgage with a lower interest rate to repay the bridging loan.

The Cons

Higher Interest Rates

The biggest drawback of bridging finance is the higher interest rates compared to traditional mortgages. Lenders consider bridging loans to be riskier because they are short-term in nature and focus more on the property value than the borrower’s creditworthiness. Due to this, they usually charge higher interest rates.

Costly Fees

In addition to the interest rates, bridging loans also come with additional fees. This includes fees for arrangement, valuation, and exit.

Repayment Challenges

If you are looking for a bridging loan, you should have a clear exit strategy (a plan for how you will repay the loan). If you fail to repay the loan, you may face penalties. In the worst-case scenario, you could also risk losing your property.

Short-term Nature

While the short-term nature of bridging loans can prove to be an advantage, it can also be a challenge in some cases. If you can’t secure long-term financing in time or if you can’t sell the property, you may end up in a difficult financial situation.

Limited Regulatory Protection

Bridging finance in the UK is not as heavily regulated as traditional mortgages. This means that if there are any disputes between you and the lender (such as the use of unfair lending practices), you will have fewer protections and legal options. That is why, it is very important to work with reputed lenders and seek help from reliable bridging finance brokers if needed.

Bridging finance can be a very useful tool if used carefully. It is always recommended to assess your financial situation, have a clear exit strategy, and thoroughly research lenders and their terms before opting for a loan.