A bridging loan is a secured loan where a significant property has to be placed as collateral. It includes

• residential properties

• auction properties

• commercial and semi commercial properties

• development sites

• retail shops

In a bridging loan, heavy machinery and inventory can also function as security.

The loan amount approved in a bridging loan ranges between £25,000 and £500,000. The loan is offered on the value of the collateral and not on the purchase price. A method called loan to value ratio is used for calculating the loan amount. Generally up to 80% of the total value of the property is approved in bridging loan.

Bridging loan can be obtained in two types - closed bridging loan and open bridging loan depending upon the status of the property deal. If the deal has already been finalized, then the loan will be a closed one. But if the borrower is yet to find a buyer for the property, then it will be an open loan which is slightly risky for the lender in case the sale does not materialize.

The repayment term of bridging loan is very short stretching from 1 to 12 months. During this period the borrower has to sell the existing property to repay the loan. Bridging loan has very high interest rates due to the short term and high risk involved in approving it.

While looking for a bridging loan, a borrower should compare the quotes offered by different lenders to choose the lowest possible rate. Due to stiff competition, lenders offer loans at differentiated rates. This is thus a way of countering the high interest rate charged on this loan. An online research can further help him to get better rates.