Podcast: A guide to bridging loans

In the episode, Megan & Paul chat to Alistair Ewing (Managing Director at The Lending Channel) about bridging finance, which is a form of borrowing that allows property buyers to fund their purchase while they put their current home on the market.

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Key Insights

Purpose of a bridging loan

How do bridging loans work? Bridging loans are designed to bridge the gap in property transactions, allowing individuals to purchase a new property before selling their existing one. The loan is repaid upon the sale of the current property, helping to avoid delays or chain issues in the process.

Cost considerations

While bridging loans carry setup costs, arrangement fees, and sometimes survey and legal costs, they are not as costly as payday loans. Interest rates are higher than traditional mortgages but calculated monthly, which can make short-term borrowing affordable for clients.

Interest and payment structure

Unlike traditional mortgages, bridging loans typically roll up interest costs, meaning clients don’t make monthly payments. This can be ideal for retirees or those with limited income, as payments are deferred until the loan is settled.

Asset-based lending

Bridging loans rely on the underlying property as collateral. This asset-based approach makes approval simpler, as long as the lender is confident in the property’s value and that it will be sold within a reasonable timeframe.

Flexible repayment terms

Bridging loans often come with flexible repayment options. If the client repays early (after the first month), they are only charged for the time the loan was outstanding, avoiding penalties common in traditional mortgages.

Application process

The application process for bridging loans is similar to mortgages, though it focuses less on affordability checks. The lender will require details on the property transaction, including property valuations, but income proof is mainly to verify the client’s stability.

Common scenarios for use

Bridging loans are frequently used by clients who need short-term financing to secure a new home while awaiting their property sale. They are also popular with investors or developers purchasing properties that are temporarily un-mortgageable due to repair needs.

Client awareness and professional education

Many clients are unaware of bridging finance options, often learning about them through brokers, solicitors, or real estate professionals. Educating these professionals about bridging loans is essential for helping clients navigate property transactions effectively.

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