Applying for a bridging loan can be a smart move when you’re in need of short-term finance, whether to secure a property or manage cash flow. However, many people fall into common traps when going through the application process. Understanding these pitfalls can help you avoid unnecessary stress and get the most out of your loan. Let’s break down these mistakes and make sure you’re well-prepared.
1. Relying Solely on Online Calculators
It’s tempting to use a bridging loan calculator and think you’ve got everything covered. These tools can give you a general idea of what your loan might look like, but they don’t always paint the full picture.
Stephen Clark, founder of bridging broker Finbri, says “Bridging loan calculators are useful tools for estimating costs of short-term loans, however they only provide estimates based on key factors like loan amount and interest rate, so their accuracy can vary. The easiest alternative to receive far more personalised guidance is to consult with a bridging loan broker, or contacting lenders directly.”
Essentially, while calculators are a good starting point, speaking to a professional ensures you’re getting the most accurate advice tailored to your unique situation. Relying solely on estimates from calculators can lead to unpleasant surprises down the line.
Tip: Always follow up your online calculations with a chat with a broker or lender to get a clear understanding of your options.
2. Overlooking Additional Costs
When people think of a bridging loan, they often only focus on the interest rate. But here’s the thing—there’s more to it than just the interest. Application fees, valuation fees, and legal costs can quickly add up and blow your budget if you’re not careful. Overlooking these costs can put you in a tight spot.
For example, if you’re expecting to pay back the loan within six months, but unforeseen costs pop up, that repayment period might stretch out longer than you anticipated. Suddenly, you’re paying more than you bargained for.
Solution: Make a list of all potential fees and talk them through with your broker. Don’t just take the interest rate at face value—ask about everything that might come with the loan.
3. Not Having a Clear Exit Strategy
A bridging loan is not meant to be a long-term solution. It’s short-term financing that fills the gap between your immediate need and when longer-term finance becomes available. One mistake many people make is applying for a bridging loan without having a clear plan on how they’re going to repay it.
Do you plan on selling a property? Refinancing? Make sure you’ve considered this before signing any agreements. Lenders will want to know your exit strategy, and you should, too. Without one, you’re setting yourself up for potential financial trouble down the road.
Ask yourself: What’s my plan to pay this off? If it’s selling a property, is the market favourable for a quick sale? If it’s refinancing, are you confident in securing a long-term loan?
4. Underestimating the Time to Secure Long-Term Finance
You might think the gap between your short-term need and securing long-term finance is only going to last a few weeks, but sometimes life doesn’t go according to plan. One common mistake is underestimating how long it will take to secure that long-term finance.
The process can be delayed by factors like valuation issues, legal complications, or changes in the market. If you don’t leave enough buffer time, you could find yourself scrambling to extend your bridging loan or, worse, defaulting on it.
Pro Tip: Give yourself extra time when planning. Always anticipate potential delays and ensure your loan terms are flexible enough to accommodate them if necessary.
5. Borrowing More Than You Need
It’s easy to get caught up in the excitement of having money available and take out a larger loan than necessary. But with bridging loans, the more you borrow, the more you pay in interest and fees. Borrowing more than you need can make a short-term solution become unnecessarily expensive.
While it might be tempting to have that financial cushion, ask yourself if it’s really necessary. Stick to what you need to cover your costs without inflating your repayments.
Keep in mind: Every extra pound borrowed means higher costs, so be disciplined in your borrowing.
6. Ignoring Loan-to-Value (LTV) Ratios
Loan-to-value (LTV) ratios are an important consideration when applying for a bridging loan, but they often get overlooked. If your LTV is too high, you may struggle to secure the loan at a favourable rate. Lenders typically like to keep the LTV lower to minimise their risk.
For example, if you’re borrowing against a property, the LTV ratio is the amount you’re borrowing compared to the property’s value. A high LTV can result in higher interest rates, or in some cases, make it difficult to get the loan approved at all.
Suggestion: Know your property’s value and keep your borrowing within reasonable limits to avoid inflated costs or rejection.
7. Failing to Do Proper Research
Finally, one of the most common mistakes people make is jumping into a bridging loan without doing enough research. There are many different lenders and types of loans out there, and not all of them will be suited to your needs. Failing to shop around can mean you end up with a loan that doesn’t match your circumstances or, worse, is more expensive than it needs to be.
Tip: Don’t rush. Take your time to compare options, speak to brokers, and ask questions before committing. It’s better to spend a little extra time in the research phase than regret your decision later.
Avoiding these common mistakes can help make your bridging loan experience a smoother and more positive one. Whether you’re using a calculator to estimate costs or working out your exit strategy, being aware of these pitfalls will give you the upper hand.
