Bridging Loan: Advantages and Uses

A bridging loan from a building savings can offer certain advantages over a traditional mortgage, but it also has its limitations. Let's explore the benefits and drawbacks of a bridging loan and whether it can be used for property development or business purposes.

What is a bridging loan from a building savings?

A bridging loan, also known as a mezzanine loan, is used by individuals to finance property, renovations, and other housing needs. It is provided by a building society and is linked to the existence of a building savings.

To understand bridging loans, you need to consider them in the wider context of building societies.

If you have a building savings account, you are legally entitled to a building savings loan. This means that you can borrow the target savings amount (or a small part of it) before you have actually saved the full amount. However, you need to meet certain conditions:

• You have been saving for some time (usually at least 2 years).
• You have already saved a certain percentage (usually 35-40%) of the total savings target amount.

Bridging loans are used to provide financing before you meet the conditions for a regular building savings loan. Building societies decide whether you qualify for a bridging loan, while you are entitled to a building savings loan by law. Although the two loans are linked, their terms, conditions, and interest rates usually differ.

How does a bridging loan from a building savings work?

A bridging loan bridges the time between when you have a building savings loan and when you are not yet eligible for a building savings loan. It is therefore common for clients to come to a building society to get a bridging loan and a building savings contract at the same time.

Once you have met the conditions for a regular building savings loan, the bridging loan will cease and you will be repaying a regular building savings loan.

How is the bridging loan repaid?

With most loans, like a mortgage or a regular building savings loan, you repay the principal (the amount borrowed) plus interest (the extra money you pay for the loan) in smaller amounts. The amount you owe, therefore, decreases with each repayment of a part of the principal, resulting in lower interest payments, even though the interest rate remains the same.

In contrast, a bridging loan, like some development or business loans, works differently. From the moment you get the funds, you only pay interest on a regular basis. The principal amount owed is not reduced; you pay it all at once.

In the case of a bridging loan, you pay interest regularly plus save regularly in your building savings account to save up the amount needed to get a regular building savings loan. However, this saving is not seen as repaying the principal.

Bridging loan versus mortgage

People with low financial resources also reach for a bridging loan for the purpose of buying a home if they cannot qualify for a mortgage.

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The benefits?

The loan can be for 100% of the purchase price of the property, so you don’t need to have your own savings, and it can even be unsecured, so you don’t have to guarantee the mortgage on the property or a third party.

Disadvantages?

You’ll pay more in interest due to the long period when you only pay interest and the principal remains the same, despite having a high loan and low repayment.

Similar to the interest on a mortgage, the interest on a bridging loan is tax-deductible.

Bridging loan for developers and entrepreneurs

Less well-known is also the option of a bridging loan for entrepreneurs, which can be used in the case of a development project. For example, to finance the purchase of real estate from auctions or tenders when it is difficult to obtain a standard loan due to increased risk. It can also be used to finance operational needs, such as construction or renovation, bridging periods of cash flow shortfalls. RONDA INVEST offers this option to its clients. On the other hand, it allows people to invest in these business loans.

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