How Do Bridging Loans Work?

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how do bridging loans work

Buying a property when your current home is yet to sell, can be beyond frustrating. However, a bridging loan can make life that little bit easier. It’s also possible to use bridging loans for commercial developments, auction finance, and other property purchases. But how do bridging loans work exactly?

How do bridging loans work? Bridging loans work on a basis of using your existing assets e.g. current property or land, as a cover for borrowing a sum of money to potentially purchase a new development.

Bridging doesn’t even necessarily have to just be a property purchase as it can also cover the follow:

  • Property development
  • Divorce settlement
  • Tax bill
  • Business venture
  • Buying a property
  • Auction property
  • Investing in a buy-to-let

The majority of bridging loans cover a property or development purchase, where the buyer requires to “bridge” a gap between selling and buying. In simple terms, this basically means you are able to borrow the money you need to buy your new investment, without selling your current home just yet.

However, it should be taken into consideration that bridging is a fairly short-term option, to help in the process of selling your current assets.

Looking at this more in depth, there are also certain types of bridging to consider.

The types of bridging loans

When it comes to deciding on a bridging loan, you have two options available of a closed or open loan.

Closed bridging loans

A closed loan, are for those with more of a clear exit strategy. For example, you have a current property being sold and you are aware of when the money will be available to pay back your bridging loan.

With this in mind, you can set up a repayment schedule with your lender to prove that the finances have been organised. For a closed loan, you will need to provide evidence to show this as it will help with your application being accepted.

Because of the terms set out early on, closed loans tend to have lower interest rates and can usually be settled within a few months. This also makes eligibility of an applicant more successful, as it gives the lender confidence of a repayment plan.

Open bridging loans

On the other hand, an open loan is when you don’t have a current exit plan in place. This is ideal if you need urgent funding but don’t necessarily have the sale of a house in motion as of yet. This means you are still able to borrow the money, but with no exact repayment schedule in place.

Open loans provide great flexibility, but as they are seen as a slight risk to lenders (due to no repayment plan) so interest rates can be higher in comparison to a closed loan.

With the intention of paying the loan back eventually, most loans are settled within the first 6-12 months.

With this in mind, you may be wondering about the application process of a bridging loan.

The application process

You’ll be pleased to know that the application process for bridging is nowhere near as intrusive as a mortgage, and this is what makes it an ideal method of borrowing.

Firstly, you may want to consider if you’re eligible for a bridging loan. You may be required to have proof of a previous property, to put up as collateral, to prove you are able to pay the loan back. If you are using bridging for another reason, then again, evidence will need to be in place to show a future option of repayment, even in an open loan option.

Onto the process itself, it’s as simple as either completing a quick form online or calling up to answer some brief questions. As well as the usual basic details, you may also be required to give the following information:

  • Amount you wish to borrow
  • Property price
  • New purchase price
  • Potential exit strategy
  • Current income

After this has been processed, you should hear back within 24 hours to whether you have been successful. The next step will only take a few weeks, to send any relevant documents to prove income etc. and for your current property to be valued. After this has been completed then the money is ready to be transferred.

In addition to this, you can also inquire about how much the whole repayment is potentially going to cost.

How much do bridging loans cost?

As with any loan, bridging comes with its own set of interest and fees. As previously stated, interest rates will be lower on a closed loan option.

Some lenders may add charges such as administration fees, early exit fees, valuation and legal. This all depends on the terms and conditions of your borrow.

Here is an example of how much a bridging loan could cost you, say if you borrowed £200,000 over a 1, 6 and 12 month basis with an interest rate of 0.65%:

 1 Month2 Months3 Months
Fees£4,060£4,060£4,060
Interest£1,314£7,884£15,768
Total£205,374£211,944£219,828

You can read more about the costs of bridging loans in this guide to how much they cost.

Related questions

Can you get a bridging loan with a bad credit score?

With any sort of financial borrowing, a credit check will be necessary. The good thing about bridging is that its main purpose is using your assets as a basis of repayment rather than your credit score exactly.

Although this will come in to play, it is something to be discussed with your financial advisor about what your options are. Being accepted for a bridging loan with a poor credit score is much more successful in comparison to applying for a mortgage. It is definitely doable, and in the long run it will actually better your credit score.

Once your repayments are completed, and in the timely manner set out, this will overall improve your credit score.

How is a bridging loan calculated?

If you are wanting a quick calculation of how much your loan will cost, you can either use an online bridge calculator or call up an advisor for this. This will be calculated on a basis of your current property value, outstanding mortgage and the loan you wish to borrow.

This will then be combined with the interest rate, lender arrangement fees and a possible exit fee.

Need specialist advice?

Complete the form to arrange your initial free phone consultation with a bridging loan adviser:

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