A bridge loan is also known as interim financing, gap financing, bridge financing, or a swing loan. It’s a type of short-term financial loan used until the debtor is able to secure permanent financing or remove any existing obligations which are causing the need for the loan.

Bridge loans are most commonly used for property and in real estate, but are also present for businesses looking to leverage some short-term funds. They provide instant cash flow, but often have high interest rates which could result in greater overall expense, leading to them often being short term. They are also usually back by collateral such as your old home, another property, or your business’ inventory.

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First and Second Charge Bridge Loans

There are two different kinds of bridge loans depending on the collateral you’re putting up. These include:

1. First Charge Loans. This is where you own the asset you’re leveraging, such as a home or property you’ve fully paid off and are no longer mortgaging.
2. Second Charge Loans. This is the opposite, where you don’t fully own the asset, such as in the case of an active mortgage.

First charge loans are generally the more desirable of the two, as they don’t require you to be making the additional mortgage payments on top of the interest of the loan itself. Being eligible for a first charge loan also means you have more equity in your property, often making the terms of a loan more favourable.

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Open and Closed Bridge Loans

The length of your loan’s term and the agreed ending date also change its classification. There are two options based on the term:

1. Open Loans. These don’t have a specific end date, but are usually expected to be repaid within a year. High interest rates may also encourage you to pay the loan sooner rather than later.
2. Closed Loans. These have a fixed end date, which means you’ll need to have paid off the loan by the agreed upon time. This can help keep costs lower, but does mean you need to secure the reason behind the loan before time runs out.

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Bridging finance comes with a number of benefits to both homeowners and benefits. Some of the main advantages of a bridge loan include the quick application, approval, and funding processes, along with the immediate short-term cash flow it provides.

On the other hand, you might not want to take out a bridge loan if you’re looking for something a little longer term. The high interest rates and large fees of bridge loans can make them expensive, and if you’re also paying concurrent fees on multiple properties then the costs can quickly start to add up.

Bridge Loans for Homeowners

As is in their name, bridge loans help to “bridge the gap” when finance is needed but not available – such as when you’re trying to sell your house to fund a new one, but want to move as quickly as you can.

With a bridge loan, you can use the equity in your home as a down payment on a new one while you wait for it to sell. This gives you extra time to find a buyer and peace of mind that you can proceed with your purchase, but it is important to understand that the high interest rate (comparative to other loans) may make its own impact on your financial situation.

Bridge Loans for Businesses

When your business is waiting on their long-term finances, you’ll still need funding in the meantime. Bridge loans allow businesses to secure short-term funding to continue their operations while they wait for the longer-term funds to come through.

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The cost of a bridge loan can be broken down into several factors, including:

• Broker fee
• Valuation fee
• Lender fee
• Solicitor fee
• Exit fee
• Admin fee
• Interest payments

For example, you may need to pay a valuation fee to the lender when securing a loan against a property, as the lender may need one of these to get an accurate loan-to-value ratio and price their bridge loan accordingly.

The end of your loan’s term can also come with admin fees, such as when changing the name on the deed or processing any final parts of the property handover process.

On top of these factors, you will also need to pay the interest on the loan, which is often relatively high – anywhere from 6% to over 19%.

The actual cost of your loan will depend on a variety of factors like the lender’s rates, current interest rates, the value of the loan, and the repayment term. That’s why it’s important to really consider your situation and needs before you engage in any form of bridging finance.