A Quick Beginner’s Guide To Bridging Finance

A bridging loan is a short-term loan usually taken out for a few weeks, months, or a year until long-term finance is arranged. It is a secured debt and is also called an additional fund that borrowers take on top of their existing home debt. It means that bridging finance provides you funds during a period when you are trying to sell your current home to complete the purchase of a new home.

Such loans are expensive as compared to traditional ones. However, these loans are taken for a short time, so the overall cost is still lower than those which charge interest rates for 20 to 25 years.

Here we will describe everything you need to know about these loans and also how they work.

Bridging Finance Explained?

Bridging debts are most commonly used for buying a home or investing in property. For example, if you need to buy a new home but are waiting for funds to become available by selling an existing property. However, it may take longer to sell your existing home if you do not find a buyer or in completing the paperwork formalities.

In such circumstances, a bridging debt can be a perfect solution. In a bridging loan, you can get money by using your old home as a security and then use this as a deposit for your new home or property. You are expected to repay the debt amount shortly as soon as your property is sold.

The Borrowing Cost Of Bridging Loan UK?

Bridging loans can be an expensive way of borrowing and are priced monthly rather than annually because people take out such debts for a short period. Interest rates of bridging loans in the UK are relatively higher than the traditional property mortgages and mortgages. It can vary from lender to lender and ranges from 0.4% to 2% per month. When you are considering taking out a bridging debt, you must look beyond the interest rates.

Bridging loan providers charge a lot of other fees that add up to the cost of bridging loans. It can include arrangement fees, administration fees, exit fees, valuation fees, legal fees and broker fees. You must look at these charges so that you can decide whether you can afford to take a bridging debt or not.

borrowing-cost-of-bridging-loan

How Long Can You Take A Bridging Finance?

A Bridging loan is a short-term debt, so usually, you have to pay it within a year. However, many providers also offer to finance for up to 36 months. Usually, there are two types of bridging loans, and the repayment terms and date depend on the type of loan you are taking. If you choose an open bridging loan, there is no fixed repayment date in it. This type of debt is best for you if you are not uncertain about the availability of long-term finances.

On the other hand, if you select a closed bridging loan, it has a fixed repayment date, and you also need to tell the lender about what funds you will use to repay the debt. Closed bridging loans have more acceptance rates and low-interest rates than open bridging loans. It is because the lenders find closed bridging finance a secure option as they have a repayment date and exit plan.

How To Pay Bridging Finance Interest Rates

Although bridging finance comes with high-interest rates, lenders offer you flexibility in repayment. There are three main ways in which interest rate is charged that include:

Monthly

You can pay an interest rate in monthly installments. This way, you do not need to pay heavy payments at the end of loan terms.

Retained

You can borrow an interest upfront for a specific period and pay it back at maturity.

Rolled Up

Interest rates are added to your borrowing cost, and you need to pay it at the end of debt terms. In this case, there are no monthly payments. It is the best way for businesses or individuals who have monthly cash flow problems.

How Much Can You Borrow From Bridging Finance?

Bridging debts tend to start from £25,000 and can go up to £100 millions. However, several factors can affect the amount that you can borrow.

The interest rate on bridging loans is higher than the standard home loan; it means that it is a costly option.

Potential Benefits And Drawbacks Of Bridging Finance

Before choosing any financial option, it is essential to look at its pros and cons. To help you out here, we are providing you with the possible
pros and cons of bridging debts.
pros-and-cons of bridging loan

Benefits Of Bridging Finance

1. Quick to Arrange:

Bridging loans especially, commercial bridging loans, are quick and easy to arrange because they are unregulated. For property deals that are dependent on such loans, the speed of funds to become available is very important.

2. Convenience:

Bridging loans allow you to complete property purchase straight away instead of waiting for funds to become available by the sale of existing property.

3. Repayments:

In bridging debts, you have the option to pay the interest rate at the end of the loan term. In this way, your monthly cash flow is not disturbed, and you can pay the borrowed money and interest after the sale of your property.

4. Available for Diverse Situations:
As the mortgage is generally available for only habitable properties, bridging finance is available for refurbishment and development projects for the land where even nothing has been built yet.
5. Avoid Renting:

If the timing of bridging finance and sale/purchase of property is right, you can prevent yourself from the hassle of renting out your existing property before the sale of the existing home and settlement of a new home.

Bridging Loan Drawbacks

1. High-Interest Rate:

The interest rate on bridging loans UK is usually higher, i.e. 1 to 1.5% per month, and it works out as a 6 to 19% Annual Percentage Rate. Moreover, as the interest rate is charged monthly, the more time it takes to sell your property, the more interest you have to pay.

2. Risk Of Repossession:

In a bridging debt, you have to use any of your property as security. If due, for any reason, you fail to repay the debt, the lender can sell your property to get his amount back.

3. Range Of Fees:

Lenders charge several fees that you must keep in mind before taking a loan. These fees include a setting up or arrangement fee, valuation fee, legal fee, administration fee, and broker fees.

We hope that this article will help you understand how bridging loans work, their benefits, and their risks. Now you can make an informed decision whether you want to take bridging loans or not. Another thing you want to keep in mind is always choosing a well-known and highly reputed lender that has a good track record. Use comparison sites to compare bridging loan providers and select the one that meets your requirements.

What Can You Use A Bridging Finance For?

Typically a bridging debt is used to purchase a property, but you can also use it for a number of purposes that include:

How Can You Get A Bridging Loan?

You can get a debt from a direct lender or through a broker. Here are some steps that can help you in understanding how to apply for bridging finance UK.

Borrowers with bad credit scores can also get bridging finance. However, such borrowers carry more risk because the lenders offer high-interest rates that increase the cost of borrowing. Thus, you may not be able to get a bridging debt at affordable rates when you have bad credit.

How Much Time Does It Take To Get A Bridge Finance?

It is straightforward and quick to apply for a bridging loan. Once you compare all the lenders and find the best deal, you can make your application online. Usually, within 24 hours, you will find out whether your application is approved or not.

Speed is the key to bridging finance, and it takes a short time in approval compared to conventional bank loans. Once your application is approved, you will get cash transferred to your bank account. If you want quick approval, you may need to pay extra to proceed with your application.

Who Offers Bridging Loans ?

Before 2008 there were a few lenders that offered bridging finance. But with time, more and more borrowers are attracted to this type of short term debt. There are many places where you can get a bridging loan. It includes large banks, small lenders, specialist bridging finance providers and brokers. You can take a loan from a direct lender or through a broker. However, when you take out debt through a broker, you also have to pay broker fees, which can make your debt expensive. Therefore, we suggest you take debt from direct lenders.

You should shop around and make price comparisons to unveil the best bridging finance. If you do not have time to go to the market or do research on each lender, you can use online comparison sites such as short-term.

Such websites quickly compare leading bridging loan providers in the UK. This way, you can find the best deal without wasting your effort and time.

What Are The Alternatives To Bridging Loans?

Although bridging loans offer a number of benefits to the borrowers, it doesn’t need to fit every borrower’s requirements. So you should explore all the available options in the market before making a final decision. If you can not afford to take a bridging debt, you can take out a second mortgage at your home or go for a secured or personal loan. Another option that you can consider is a buy-to-let mortgage.

In this option, you can take a mortgage to purchase a property and then rent it out to pay off your mortgage. The most common alternatives to bridging finance are remortgaging and buy-to-let mortgages.

Wrapping Up:-

 

We hope that this article will help you understand how bridging loans work, their benefits, and their risks. Now you can make an informed decision whether you want to take bridging loans or not. 

Another thing you want to keep in mind is always choosing a well-known and highly reputed lender that has a good track record. Finally, use comparison sites to compare bridging loan providers and select the one that meets your requirements.