How does a bridging loan work?
Bridging loans are normally taken out for between 1 month and a year. The loan is repayable at the end of the term.
There are two kinds of bridging loan:
Closed bridging loan
You will need to know exactly how you will pay off the loan from the outset (your ‘exit strategy’).
For example, if you are selling a property, the repayment date might be the agreed completion date. Bridging loans are repaid back in a shorter period than a typical mortgage. These loans are repaid within a couple of months.
Open bridging loan
You will not need a clear exit strategy for settling the loan from the outset and will normally have a year to repay the loan.
Unlike conventional mortgage lenders, most bridging loan lenders do not charge a penalty fee for early repayment. So, if you were to take out a 10-month bridging loan but have the financial funds to pay back the loan after 3 months you can do so, saving yourself money on the monthly interest payments.
Bridging loans usually have higher interest rates than conventional mortgages, although they are becoming increasingly competitive.
Failure to repay a bridging loan at the end of a term is likely to incur significant costs and can lead to repossession of your property.