There is perhaps no better feeling than knowing you have found your forever home and the one you want to purchase. But the most common headache that potential homeowners face, is how to manage paying for it in a means that is manageable within their financial purview. A bridging loan is a perfect way to purchase your dream home in a timely and cost efficient manner.
A bridging loan can be used for a property purchase because it’s secured along with the property valuation. This means lenders will consider borrowers whose credit record or regular income is not exactly in line with high street banks and mortgage lenders who won’t consider them.
In this guide, we will take a closer look at how a bridging loan can be used for new property that is either residential or commercial. We will also answer some frequently asked questions about this common option and how bridging loan alternatives are one of the most convenient options to consider to place you in your desired home.
At Bridging Options, we strive to offer these convenient services to our clients. Read on to find out more about this invaluable opportunity.
How do bridging loans for house purchases work?
Simply put, the majority of bridging loans cover a property or development purchase, where the buyer requires to “bridge” a gap between selling and buying. What this basically means is that 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.
But when it comes to a house purchase that you would like to progress with rapidly, the most attractive option would be an open bridging loan.
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) 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.
What is the criteria?
The amount you can borrow for a bridging loan is entirely at the lender’s discretion.
If you take a bridging loan on an existing property where is no other finance secured against it (such as a mortgage), then this is known as a first charge.
If you take out a bridge loan on a property that does already have debt against it then this is know as a second charge. This type of bridging finance is often used when extensions or renovations are required.
The difference between the two bridging loans, indicate who would get priority repayment if the loan could not be settled by the end of the its original term.
Interest rates on bridging loans are normally fixed for the duration of the loan term, although variable interest rates can sometimes be an option.
How much interest you need to pay will depend on a number of factors, such as:
- Your financial circumstances and current credit score
- Size of the loan
- LTV – loan to value based on the current value of the property and the amount it will be worth upon completion. You can normally borrow money in the region of 65-80% of the property’s value.
What type of bridging loans are there for house purchases?
Bridging finance is divided into two types when you are seeking a bridging loan to buy a house: open and closed.
Closed bridge loan for house purchase
A closed bridging loan requires you to have a set date for repayment at the outset.
This means that you have a credible payment plan and can inform your lender of your exit strategy.
This may involve the sale of a property or the securement of longer-term finance. This type of bridge loan carries less risk for the lender, and therefore, tends to be offered with better rates of interest. Closed bridging loans are usually settled within a couple of months.
Open bridge loan for house purchase
This bridging loan can be taken without a specific end date or an exit strategy in place.
This type of bridging loan is much more flexible, often with open ended repayment terms and is commonly used to obtain funds for urgent transactions.
This type of bridge loan carries significant risk to the lender and for this reason, the rates for an open bridging loan, inherently tend to be higher.
What deposit and expected fees come with a regulated or unregulated bridging loan?
In addition to the interest rates you have to pay, there are also a number of fees which may apply. This can often be the most expensive part to a bridge loan.
Your deposit is set by the lender, and fluctuates depending on a wide range of factors that we will explain below.
Each lender tends to charge different fees. This is why a bridging loan broker is often useful as they can shop around and negotiate the best loan on your behalf.
Types of fees you can expect to pay include:
Arrangement fee
This is charged for setting up the loan on your behalf and is generally calculated at 1-2% of the overall loan.
Exit fee
This is applicable if you pay off the loan early. It is often in the region of 1%, although not all lenders charge this fee.
Administration fee
This is cost of processing your bridge loan paperwork.
Legal fees
This is normally a set cost that covers legal and solicitor fees for both you and the lender.
Valuation fee
This covers the cost for a surveyor to carry out a valuation of your property. (See LTV description below).
Broker Fees
If you take out a bridging loan through a broker, then this fee pays for their time. It is usually calculated at 1% of the loan.
As a general rule of thumb, in additional to the bridging loan interest, you can expect to pay around 3% of the total loan in fees and an additional two sets of legal and solicitor fees.
Bridging lenders will quote a maximum loan to value (LTV). The LTV is calculated by taking the size of the loan and dividing it by the price of the property you are using to secure the bridging loan. For example, if you take a loan of £100,000 which is secured against a property worth £200,000, you have an LTV of 50%.
Lenders tend to consider the LTV based on what you either paid for the property or on its current market value and will instruct a surveyor to value your property in advance. Some, however, may offer bridging loans based on the gross development value, which looks at what your property will be worth once you’ve completed your planned projects on it.
Are bridging loans worth it?
Bridging loans tend to be one of the most efficient types of specialist finance for property purchases in the UK.
A first charge loan or even a traditional second charge bridging loan secured against mortgage problems on an existing home with a fixed repayment date and high exit fees, are some of the main reasons potential homeowners seek to bypass mortgage brokers.
If you are not a lender, bridging loan costs, as well as the applicable loan interest rates that tend to be high on a second charge loan, can be confusing and unattractive.
But the silver lining here is that these loans can be a welcome relief for fixed rates and long mortgage terms.
FAQs:
Why choose Bridging Options?
At Bridging Options, we know how important it is to ensure you have gathered all the proper information to secure residential property. Bridging loans are a mainstream and common tool you can use to ensure you can move quickly into your dream home.
We regularly help clients with this issue, and strive to find ways to help those facing the prospect of securing financial services with affordable valuation fees and the lowest monthly interest payments possible.
For more information on bridging loans, rates and monthly repayments in several options, and how an open, new secured loan can help you purchase a new home, contact us for an informal chat and a free, no obligation quote.
Experts in bridging loans, our friendly financial specialists are available for you to call or contact online today for expert advice.