Buying and selling property can be precarious, stressful and often leads to heartbreak. But, by taking out a short term bridging loan, you’ll not only secure the house of your dreams but save yourself a home buying headache in the long run.
What is a bridge loan?
Bridging loans essentially “bridge” the gap between selling and purchasing assets. A bridge loan can provide you with temporary funds in order to purchase a new property, whilst you are still in the process of selling an existing one.
A bridging loan is a type of short term, asset backed finance, designed to help property purchases and developments move ahead quickly.
Usually offered on terms of between 18 months or less (depending on criteria), funds can be made available within days. This makes bridging finance one of the fastest ways of accessing capital.
Plus, unlike other forms of borrowing, when you take out a bridge loan, the monthly interest is often included, meaning there are no repayments to make during the term of the loan.
What are bridging loans used for?
A bridge loan can be used for both private and commercial use and are mostly (but not exclusively) used by landlords, homeowners and property developers to:
- Buy property when there is a gap between the sale and completion of a chain.
- Assist with buying at auction.
- Initiate new property development, restoration or conversion work.
- Invest for buy-to-let purposes.
- Purchase uninhabitable property or property that is under market value.
- Prevent repossession.
So, if you need access to funds quickly, have a property that is not yet eligible for a mortgage or have had previous funding that has fallen through – contact our experienced advisers today. Our expert team are the best in the bridging loan business and can offer free advice and a no obligation telephone consultation.
Types of bridging loans
There are two main types of bridge loans that you can choose between:
- A closed bridge 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.
- An open bridge 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.
How much can you borrow with a bridging loan?
Bridging loans can start from as little as £5,000 (although a personal loan may be more appropriate) and can go up to as much as £250million, depending on the number of properties put forward. The amount you can borrow for a bridging loan is entirely at the lender’s discretion.
If you take a bridging loan on a 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 loan is often used when extensions of 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 in the region of 65-80% of the property’s value.
How much do bridging loans really cost?
When taking out a bridging loan, most people only consider the amount they want to borrow and look for the lowest rate of interest possible. The trouble with doing this, however, is that the combined cost rarely equals the final amount as there are often large exit fees, fund management fees and other ‘hidden’ charges.
Pros of taking a bridging loan
One of the most commonly asked questions that our experts often hear, are whether bridging loans are a good investment. Bridge loans are a good investment, when:
- You need to borrow money quickly. Some bridging loans can be arranged in a matter of hours, so speed is a big part of their appeal.
- You are looking to borrow large sums of money – up to £250 million.
- You have a property that can’t be secured any other way, such as a building that requires funding for restoration.
- You require flexible borrowing or re-payment plans. Bridging loans come with a host of different payment options allowing you to either pay monthly, pay in full at the end of the loan term or borrow more than you actually need to cover the cost of both the loan and interest owed.
Cons of taking a bridging loan
Bridging loans are great in that they offer a short term finance option, but it is vital that you understand all the implications before taking one. The downsides to bridge loans are:
- That they come with high rates of interest. Bridging loan rates are usually set at around 1-1.5% per month, as opposed to a mortgage repayment which is 5% APR (annually). Therefore, a bridging loan could cost you between 13-19% APR.
- That the loan is secured against your property or assets, which you risk losing if you fail to repay the bridging loan.
- That there are a number of additional charges which could prove costly. These include an arrangement fee for the bridging loan set-up (1-2%), exit fee (1%), repayment fee, valuation charge and legal costs.
Are bridging loans regulated?
Bridging loans secured as a first or second charge on a property you, your partner or a close family member live in, are normally regulated by the Financial Conduct Authority (FCA).
That means that there are rules surrounding how the lender should operate, and you can log a complaint to the Financial Ombudsman Service if you feel you have been mis-sold or there is a problem.
If, however, you take out a bridging loan that is secured on a property that you, your partner or a close family member do not live in, it is likely to be exempt from FCA regulations. This is also the case when a bridge loan is taken out under the name of a company or business instead of a person.
Applying for a bridging loan
If you would like expert advice on your bridge loan options, then why not talk to us about the best form of bridging finance for you and your circumstances.
For a free, no obligation telephone consultation, call us today or complete our online enquiry form.