Bridging loans are short-term secured loans designed to provide quick and easy funding, typically for property transactions or business ventures. They offer a flexible solution for various financial needs when time is of the essence.
The length or term of a bridging loan significantly influences its suitability for your project, its cost, and the terms you’ll need to meet.
Whether you’re a property investor aiming to capitalise on a time-sensitive opportunity or a homeowner needing to complete a property purchase before selling your current home, understanding loan durations is key to making good decisions.
This guide will explore typical bridging loan terms, elements that shape loan duration, how different time-frames affect costs, and practical advice for selecting the right term for your needs.
Understanding Bridging Loan Terms
Bridging loans are recognised for their adaptability, but they come with set terms that borrowers should be aware of.
These loans are typically available for periods spanning from a few weeks to 24 months, with some lenders offering up to 36 months in specific situations.
The shortest term for a bridging loan is usually about one month, though this can differ among lenders. Most borrowers choose terms between 3 to 12 months, which aligns well with the timelines of many property transactions or refurbishment projects.
Open and closed bridging loans
Open bridging loans don’t have a fixed repayment date, offering more flexibility but often at slightly higher interest rates due to the increased uncertainty for the lender.
Closed bridging loans, on the other hand, have a set repayment date, typically linked to a specific event such as the completion of a property sale. These loans usually come with lower interest rates as the exit timeline is clearly defined.
The maximum available term depends on the lender and the specifics of your case.
While 12-24 months is standard, some specialist lenders might offer terms up to 36 months for larger, more intricate projects. Understanding these term structures is key to determining whether a bridging loan fits your project time-frame and financial objectives.
Factors Influencing Bridging Loan Duration
Several key elements shape the duration of a bridging loan.
The intended use of the funds significantly impacts the loan term.
For instance, a loan to buy a property at auction might have a shorter term compared to one for extensive property renovations. The nature of the security property can also affect loan duration, with standard residential properties often securing longer terms more easily than non-standard or commercial properties.
Your plan for repaying the loan, known as the exit strategy, is critical. A clear, viable exit strategy, such as a property sale or refinance, can often secure longer terms if needed. Lenders will examine this closely when determining loan duration.
Read more: Bridging loan exit strategies
Each lender has their own criteria and risk tolerance. Some focus on very short-term loans, while others are comfortable with longer durations. Your credit history, income, and overall financial health can influence the loan term a lender is willing to offer. Stronger financial profiles might secure longer terms if required.
The current state of the property market and wider economy will impact loan durations.
In uncertain times, lenders might prefer shorter terms to minimise risk. The loan-to-value (LTV) ratio also plays a role, with higher LTV loans sometimes restricted to shorter terms due to increased risk for the lender.
For regulated bridging loans, those secured against your home, the maximum term is 12 months due to regulatory considerations. By taking these factors into account, you can better understand the loan terms available to you and negotiate more effectively with lenders.
Read more: Are bridging loans regulated by the FCA?
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Common Bridging Loan Timeframes
Bridging loans typically fall into short-term, medium-term, and longer-term categories. Each serves different purposes and comes with its own set of advantages and considerations.
Short-term bridging loans, lasting 1-3 months, are perfect for situations requiring immediate funds with a quick turnaround.
These loans often support auction purchases where completion is required within 28 days, help prevent property chain breaks, or allow borrowers to seize time-sensitive business opportunities.
The main advantage of these ultra-short loans is lower overall interest costs due to the shorter borrowing period. However, they come with high monthly interest rates and put pressure on borrowers to secure exit finance quickly.
Medium-term bridging loans, spanning 3-12 months, are the most common.
They suit a wide range of purposes, including property refurbishments, buying property before selling an existing home, or supporting business cash flow. These loans strike a balance between quick funding and reasonable time for exit strategy execution.
They offer more flexibility to handle unexpected issues and can have more competitive interest rates than very short-term loans. However, they do require a clear exit strategy and result in higher total interest costs compared to short-term loans.
Longer-term bridging loans, typically 12-24 months, are used for more complex situations such as major property developments, large-scale renovations, planning gain opportunities or complicated refinancing situations.
These extended loans provide ample time for complex projects and can be more cost-effective than taking out multiple shorter loans. They also allow for unforeseen delays in exit strategy execution.
On the downside, they come with higher total interest costs and might have stricter lending criteria. Not all lenders offer these extended terms.
When choosing between these time-frames, consider your project timeline, exit strategy, and overall costs. It’s often wise to add a buffer to your estimated time-frame to account for unexpected delays.
The Impact of Loan Duration on Costs
The duration of a bridging loan significantly influences its overall cost as loan interest is calculated on a daily or monthly basis.
Interest rates for bridging loans typically range from 0.5% to 1.5% per month, depending on the loan term and other factors. Shorter-term loans often have higher monthly interest rates but lower total interest costs.
Fee structures also play a role in the overall cost.
Arrangement fees are usually 1-2% of the loan amount, regardless of term and many borrowers add this to the loan, aiding their cashflow.
Valuation and legal fees are typically fixed costs, independent of the loan duration. Some lenders charge exit fees, which might be higher for longer-term loans.
The key is balancing the cost with your specific needs and risk tolerance. It’s worth noting that many bridging loans allow early repayment without penalties. This feature can help manage costs if your exit strategy comes to fruition sooner than expected.
Extending a Bridging Loan
While bridging loans are designed as short-term solutions, circumstances sometimes necessitate extensions.
Extensions might be needed due to delays in property sales, unexpected issues in renovation projects, or complications in refinancing processes.
If you find yourself in need of an extension, it’s important to contact your lender as soon as you anticipate the need. You’ll need to provide a detailed explanation of the delay and your revised exit strategy.
The lender will then reassess your case, potentially requiring updated valuations. If approved, new terms will be issued, and will require additional fees.
It’s important to note that extensions are not guaranteed and come with potential consequences and costs.
To minimise the need for extensions, it’s wise to initially choose a loan term that allows some buffer for unexpected delays. If an extension becomes necessary, open communication with your lender is key to finding a workable solution.
Choosing the Right Loan Term
Selecting the appropriate term for your bridging loan is an important decision that impacts both your project’s success and its overall cost.
To make the best choice, you need to carefully assess your project timeline. Break down your project into stages and estimate realistic time-frames for each stage.
Consider potential delays in planning, construction, or sales processes.
It’s also wise to build in contingencies.
Add a buffer of 1-3 months to your estimated timeline to account for unexpected delays. Take into account seasonal fluctuations in the property market and consider potential delays in securing long-term finance.
Balancing cost with flexibility is another important aspect.
Shorter terms generally mean lower total costs but less flexibility, while longer terms provide more breathing room but at a higher overall cost. Consider the cost implications of potentially needing an extension.
Remember, the right loan term aligns with your exit strategy while providing enough flexibility to handle unforeseen circumstances. It’s often worth opting for a slightly longer term to avoid the stress and potential additional costs of needing an extension.
Need some help?
If you need a short-term bridging loan then a specialist broker is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.
To get matched with a specialist broker, please call us on 0330 030 5050.
