A bridging loan is specifically used when property is being purchased. It can be used when a home is being restored or built and a mortgage cannot be given on the property because there is not enough value in the property to issue one or for when a home is being bought and the sale of a home has not completed so there is not the money available to purchase the new property. Therefore there are situations where it can be useful, but, as with all borrowing it is risky and expensive and so is it worth it?
A bridging loan is always seen as a short term solution to a financial gap. However, they are very expensive and this means that you have to be prepared to pay a premium interest rate while you have them. They are also high in administration fees, as well as legal fees on top of the high interest rate and you could end up paying a huge amount of money for them. You need to therefore be very careful, work out how much it would cost you and whether this is something that you can afford and are willing to pay. Lenders are not so willing to give out these loans these days either and this can mean that there is not a lot of competition in the market and they can therefore be even more likely to be expensive.
Bridging loans are usually taken out by property developers or landlords who need help with finance. It may be that they have bought a home at auction, need to pay for it quickly and do not have the time to organise a mortgage. In this case they would probably only have the loan for a very small amount of time and therefore the total cost would not be too high. There is always a risk that they will not get a mortgage on the property and then they will hold the bridging loan for a long time at a large expense, but this is unlikely.
Property developers may take out the loan to pay for work being done on a property which cannot be financed in other ways. Getting a mortgage on a property can be difficult if it is in a state of disrepair as you cannot borrow more than the current value, once some of the work has been done a lender may be willing to extend or give a mortgage which will be cheaper and will allow the bridging loan to be paid off. This is a more risky situation as if the work is not done well and not seen to increase the value of the property, property prices fall generally or more problems are discovered and even more work needs doing, there may be a delay in issuing the mortgage or a mortgage may not be given at all. This could lead to huge financial problems in the short and long term and so it is a big risk to take. If you cannot secure a mortgage, then you could end up losing your home due to not managing the repayments on the expensive loan.
It is worth thinking hard about your current financial situation and how well you manage at the moment. Consider how things will change with a bridging loan and whether you will be able to afford the repayments. It can be worth spending some time working out how much the repayments will actually be and seeing whether you have enough to cover them. If you are not sure work out how much you have coming in and going out each month and see whether you would have enough. If you don’t then think about whether there is anything that you can change to improve this situation. If this was a long term situation think about how well you will manage then. It is also worth considering whether there are any alternatives. There may be different ways to borrow the money, for example, which could be cheaper than this, so look into that. It may be possible for you to wait and save up the money before buying a property or having work done so that you do not need this sort of loan. It may be wise to just forget the idea altogether if you think that it will be too much of a risk for you.