Discover how bridging and hard money loans work. What bridging loans for bad credit can do and if they are the right solution for you.
Bridging Loans: What Are They?
A bridging loan (or ‘bridge loan’) is a short-term loan lent by loan providers to cover an interval period before a larger or long-term finance solution can begin.
Bridging loans are commonly associated with the buying and selling of property. They’re neither a mortgage nor, given their high costs, a long-term financial solution.
Bridging loans ‘bridge’ the gap between the need for finance and its availability. There are two types of loan bridging. Closed loans and open loans.
- Closed bridging loans offer fixed repayment schedules. The loan starts after the exchange of contracts and finishes upon completion of the sale.
- There is no fixed repayment date with an open bridging loan, however, be prepared to finish payments within 12 months.
To access a bridging loan, you will need both the necessary equity and mortgage plans in place.
Bridging loans can be expensive. Remember, you are paying for convenience and immediate cashflow. Comparative APRs range between 6.1% and 19.6%, whereas UK mortgages range from 1.9% to 5%. You’ll also need to consider extra costs, such as arrangement and exit fees.
What Benefits Can A Bridging Loan Offer?
The key benefits of a bridging loan are:
- Fast to arrange
- Flexible & diverse lending criteria
- Secured against all property types
- Bridging loans for bad credit
The bridging loan market is currently unregulated. This means lenders can distribute funds quickly and without regulatory burden.
Unlike mortgages, bridging loans are also flexible and available to all property types.
Most borrowers need excellent credit scores to access loans. This is because banks are reliant on the borrower to repay them over time. But bridging loans are different.
They focus on the potential profitability of the property or properties in question. Not the credit worthiness of the borrower. This means people with poor credit histories can access bridging loans.
Why Might You Need A Bridging Loan?
Bridging loans help homeowners complete the sale of a new home. They provide immediate cashflow over a short period of time, so buyers can maintain their place in a sale chain.
You can also use a bridging loan to help refurbish or renovate a property. To buy property at an auction. And they’re also used to help businesses with short term cash flow problems.
What Is A Hard Money Loan?
A hard money loan acts as an interim bridging loan. They are often referred to as ‘loans of last resort’ and secured against your property. Borrowers risk losing their property if they don’t maintain terms.
Whereas bridging loans are often funded by loan and mortgage providers. Private money lenders supply hard money loans to help fund real estate ventures.
Investors offer hard money loans on a case-by-case basis. So, there is no formal underwriting process involved.
Like bridging loans, hard money loans can be costly. APRs can vary between 7.5% to 15%, with your property guaranteed as collateral.
They also tend to have lower loan-to-value (LTV) ratios, around 50 to 70%, compared to 90% for regular mortgages. This protects lenders. It enables them to sell your property quickly to recoup their investment.
Why Use A Hard Money Loan?
The key benefits of a hard money loan are:
- Easy approvals
Hard money lenders are not concerned about a borrower’s ability to repay. This is because they focus on the potential value of the property to guarantee the loan.
This simplifies the lending process, making it quicker and easier to approve funds.
Why Might You Need A Hard Money Loan?
Hard money isn’t right for everyone. But for those unable to access traditional forms of funding, they are a viable solution.
Property developers are a good example of people using hard money loans. They own the property long enough to make a profit, then sell and repay the loan.
Despite their similarities, the main differences between bridging and hard money loans are:
- Banks and mortgage lenders do not offer hard money loans. Only private investors and companies.
- Hard money loans have lower loan-to-value ratios.
- Bridging loans are available to homeowners, whereas hard money loans aren’t.
- Hard money loans finance property development. Bridging loans help finance homeownership.
Both types of loan focus on the potential value of a property and offer attractive solutions to people with bad credit scores.