As the name suggests, a bridging loan is short-term finance, which can be used to bridge the gap when there is a delay between income being received and a payment being required. They are commonly used for property purchases, where an existing property has not yet been sold.
There are two types of bridging loan and the one you use will depend on your circumstances. If you are progressing with the sale of your property and have exchanged contracts, then a closed bridging loan is best. This gives a fixed date for repayment and will likely be the date on which you expect the sale to complete. An open bridging loan does not set a repayment date, but it is usually expected to be repaid within a year. As they are more flexible, open bridging loans tend to be more expensive than closed bridging loans.
With both closed and open bridging loans, you would have to demonstrate to the lender how you expect to repay the loan. This is known as an exit plan, and would most likely be demonstrated with the sale of a property, or by taking out a mortgage. Just like mortgage lenders, a bridging loan lender will also need information about the property being purchased, including the purchase price and details of the property being sold.
If you are taking out a loan to keep a purchase going for the time it takes to sell your property, the lender will also want to see evidence of what you are doing to get your property to sell. For example, have you instructed multiple agents, had open house events, or lowered the price?
Some lenders offer different interest options, for example interest is saved up throughout the period of your loan and you pay it all off at the end of your bridging loan. Alternatively, you borrow interest for an agreed period in addition to the loan amount and pay everything back at the end. Set up fees of around 2% are also added to bridging loans, and there can be exit fees for paying off early, so the costs can really add up. Check out the fees and charges when completing a bridging loans comparison.
Bridging loans can be taken for any amount from as little as £5,000, but the maximum amount will vary between lenders and could be millions. A first charge loan will usually allow you to borrow more than a second charge loan, as the loan to value (LTV) percentage is often capped at 75%.
The choice of fixed or variable interest rates is also offered on many bridging loans. A variable interest rate will be set in line with the Bank of England base rate and could be lower, but it will go up and down. Therefore, you might wish to have the security of a fixed rate, where your repayments will stay the same, to enable you to budget.
It is also worth noting that in some circumstances the use of a bridging loan may affect your ability to secure a mortgage on a property in the future. These are all reasons why the decision to take out a bridging loan should not be made lightly.
When you take out a bridging loan, the lender will place a charge on your property. A charge is a legal agreement which places lenders in an order and states which lenders will be paid off first in the event you do not pay off your loans. Bridging loan and mortgage lenders use your property as security, so if you default on payments, they will sell your property to get their money back. If you have a mortgage on the property you are selling, then this will be paid off first, and a bridging loan would be a second charge on the property. However, if you own the property you are selling outright, the bridging loan will be a first charge loan on your property.
Everyone’s circumstances are different, so it is always worth seeking professional advice relevant to your own situation before considering any type of finance. You should also carry out a bridging loans comparison to find the right product.
Bridging loans are expensive as they are designed as a short-term finance option. Interest is often charged monthly at between 0.5% and 1.5% per month, and, being monthly, a small difference in the interest rate can make a big difference in the amount paid. This translates into an annual percentage rate (APR) of between 6.1% and 19.6%, which is much higher than a normal mortgage.
There are different ways of financing a project or house move, besides a bridging loan, and it is always in your best interests to get professional advice on your own circumstances. The available alternatives depend on what you need the bridging loan for and how much you need to borrow.
If you are a developer looking to build property and need finance to purchase the land and materials, you may consider a bridging loan to bridge the gap between these costs and the income you will receive from selling the property or properties once complete. In these circumstances, a development loan may be more suitable. These are also short-term loans, but they are based on the gross development value and are paid back in stages.
If you need a smaller amount, you may be able to secure a personal loan instead of a bridging loan, however, there are often stipulations on what personal loan funds can be used for and since interest rates are higher than a mortgage, these can be an expensive option also. Personal loans also affect your credit rating and may impact on your ability to secure a mortgage if this is also required.
Re-mortgaging is another alternative. This is perhaps the cheapest option; however, it is long-term finance, and the application process is lengthy. For this reason, if you need the money quickly, it may not be the right choice.
A bridging loan is ultimately a loan you choose to take out to bridge the gap between having sufficient funds to pay for something while you wait for money to arrive in your bank account. It is sometimes used when buying a property if you are still waiting to sell yours and you need the funds fast. It can be a good idea, if you are buying something that is time sensitive and there is a delay getting your funds to pay for it, a bridging loan can come in handy in these circumstances to ‘bridge the gap’.
Various lenders will look at specific criteria, and you will need to hit that criteria to qualify, but generally lenders will want property as security or any other type of collateral, they rarely use a credit history or proof of earnings to qualify people for this type of loan. As it’s a short-term loan, having collateral is highly important, lenders may want to see proof of purchase, and mortgage agreements etc.
There are two types of bridging loans...Closed bridging loans and Open bridging loans. Closed bridging loans are set up with a fixed repayment date set and agreed by the lender and consumer - these types of loans can be used if you have exchanged contracts but are waiting for your property sale to complete. With open bridging loans there is no fixed payment date, but lenders usually would want you to pay it all off within one year.
A bridging loan is a short-term finance option for buying property. It 'bridges' the financial gap between the sale of your old house and the purchase of a new one. If you're struggling to find a buyer for your old house, a bridging loans could help you move into your next home before you've sold your current one.
Yes, it's a great idea to compare different riding loans rates and deals. They are so many different lenders, rates and deals on offer for different reasons, projects and people personally circumstance. When comparing bridging loans, make sure you get the deal rate and deal for your personally circumstance.