Gap Loans are a common term for money lent to fill the gap between two situations. Customarily this involves the acquisition of a property while the sale of another one is being finalised.
Gap Finance is more commonly used terminology in the US than the UK, where bridging finance refers to the same activity.
How Does a Gap Loan Work?
When a key property deal is in danger of falling through because another property has yet to sell, gap loans are a convenient means of raising capital fast. Using the existing property as security, the borrower acquires the money to secure the deal, knowing that the loan will be paid off as soon as the property sells.
Gap Loans have much higher rates of interest than standard loans since they are geared to shorter time frames and relatively high levels of risk for the lender. They have achieved popularity in the property world where the higher costs can be absorbed via the relatively wide profit margins.
What are the Advantages of a Gap Loan?
For property developers, the gap or bridging loan has gained popularity because it can speed up property deals, meaning time-sensitive opportunities are not missed. Gap loans allow money to be freed up relatively quickly, compared to some forms of finance, meaning a position in the sales chain can be retained.
Although it is most commonly used for development, gap finance is also used for refurbishment, or to restore a property prior to refinancing it with a mortgage.
Gap loans can also be useful for buying properties at auction where a quick timeframe is required.
Are There Disadvantages to Gap Loans?
The high rates are a drawback for many, as is the fact that – for the commercial sector – gap loans are currently unregulated by the FCA in the UK. This means that some lenders include unscrupulous exit fees and hidden charges into their gap agreements so be sure to read the fine print before signing.