Bridging Loan

Bridging Loan Explained

A bridging loan can be a useful option if you want to borrow money for a short amount of time. It is used to finance the gap when you have to purchase something but wait for the funds to become available by selling another thing.

Typically bridging loans are used by individuals who want to purchase a property but are waiting for the sale of another property to get funds. Bridging loans are secured short term loans, so you must have valuable property or land to use as collateral if you want to get this type of loan.

Summary

What Is A Bridging Loan?

A Bridging loan is also known as gap financing, swing loans and interim financing. Bridging finance is a type of interest only home loan. Its value is calculated on the basis of equity in your current property. It provides you with immediate cash flow when you need immediate funding.

A bridging loan has a very high interest rate and is backed by collateral such as a property or business inventory. It allows you to fulfill their current financial obligations. These loans are short term and usually upto one year. Homeowners can use bridging loans for the purchase of a new home while their existing one is on sale.

How does bridging loans Work?

A bridging loan is usually offered for a period of 1 to 18 months. The amount you can borrow depends on how much equity you have in your home that you are using as security. The borrowers need to repay the loan amount plus the interest at the end of the loan term.

Unlike traditional mortgages, bridging loan finance is not linked directly to your income. The loan providers are concerned about the value of property and exit strategy. You can repay the loan amount either by selling a property or using a conventional mortgage route.

Types of Bridging Loans

1. Open Bridging Loans

This type of loan does not have any fixed repayment date, but usually, you have to pay it back within a year.

2. Closed Bridging Loan

This type of bridging loan has a fixed repayment date. Borrowers take out this loan when they have exchanged contracts but are waiting for the completion of their property sale.

3. First Charge bridging loan

Whenever a borrower takes out a bridging loan, a charge is placed on the property. This charge is a legal agreement to prioritise which lender will be paid first. If the bridging loan is the only borrowing secured against your property, this loan will be called the first charge loan.

4. Second Charge Bridging Loan

A bridging loan will be a second charge loan if there is already a mortgage or loan against your property. Second charge lenders usually need permission from the first charge lender before they are added.

Pros and cons of bridging loan

Pros

Borrowers can get large sums of money.
Bridging finance offers quick access to funds.
Repayment terms can be tailored to meet borrower needs.
You can use them for almost any legal purpose.
Easy lending criteria.
Borrowers with poor credit scores can also get it.

Cons

How Can You Repay A Bridging Loan?

Typically, a bridging loan must be repaid within a period of 12 months but the terms may vary depending on the lender you choose. Many people repay the loan amount with the money they got by selling their current property, but there are different options for repayment. The repayment of bridging loans are structured in different ways but usually there is a balloon payment at the end.

However, different lenders have different criteria for the repayment of the loan. It is important that you check the repayment method before taking out a bridging loan so that you can repay the amount conveniently.

Bridging loans interest Rates

Although bridging loans offer quick access to a large sum of money, they come with high-interest rates. The interest rate is charged monthly rather than annually because borrowers take out such loans for a short period.

Different bridging loan companies offer different interest rates. You can expect an interest rate between 6%APR to 20%APR. It is much higher than the interest rate that you pay on mortgage loans. However, unlike traditional mortgages, there are three ways in which interest rate is charged:

Monthly

You can pay the interest rate monthly, and it is not added to the loan cost.

Retained

You can borrow interest upfront for a specific time period and pay it all back at the end of loan terms.

Rolled Up

There are no monthly interest payments, and borrowers pay all the interest at the end of the bridging loan.

bridging loan Cost?

Bridging loans are an expensive way of borrowing money. In addition to interest rates, several other fees may add up to bridging loan costs.

1. Arrangement Fees

It is a fee that borrowers have to pay to the lender. It is usually 2% of your loan amount.

2. Valuation Fees

It varies between £900 to £2000 depending on your loan provider and how fast you need funds.

3. Administration Fees

It is a fee that you have to pay for the completion of paperwork.

4. Legal Fees

It is a fee you have to pay to your solicitor. A part of it is paid upfront, and the remaining amount is paid on completion of the loan.

5. Broker Fees

If you take out a loan through a broker, you have to pay a fee for their work.

How to get a bridging loan?

You can get a bridging loan from a direct lender or apply for a loan through a broker. It is pretty quick and easy to apply for a bridging loan. You can apply online and provide all the necessary information.

There are several things that bridging loan providers will assess before approving your loan application. First, you must have at least one property to use as a security against the loan. If you want to get a huge amount, you may need to use more than one property to use as collateral.

Unlike traditional mortgages, you can use any property to secure a bridging loan. The lenders also require a liable exit plan. It shows how and when you will repay the loan amount.

A bridging loan application is usually approved within 24 hours. Once the application is approved, funds will be transferred to your account within two weeks. This time is required for the valuation of your property, lenders to do their checks and transfer money.

How much can you borrow with a bridging loan?

Most bridging loan companies offer loans between £5000 to £10 million. However, the amount you can borrow essentially depends on the value of the property you are using as security against the loan. Borrowers are usually able to get a maximum Loan-to-value of 75% of the value of your property.

In some cases, it is possible to take a bridging loan of over £100 million. Many lenders also consider your application even if you have a bad credit score, but you have to pay a high interest rate.

What Can You Use a Bridging Loan For?

There are situations when you find yourself in need of emergency cash. If you wait for funds to become available you may lose an opportunity to buy something or invest in. A bridging loan can be a perfect temporary solution in such situations. You can use bridging finance in multiple circumstances some of which are as follows:

1. Refurbishment Finance

Sometimes a property is not being sold because it is in poor condition or it lacks the basic necessities such as a kitchen or a bathroom. Bridging loans are suitable for property developers who want to refurbish a property to sell it at good prices. You can take a bridging finance for refurbishment purpose and repay the amount upon sale.

2. Maintaining A Place In Sales Chain

When you want to purchase a property but waiting for your existing property to sell so that funds become available. You can fill the gap by taking a bridging loan till the sale of your property is done. You can use the amount of the bridging loan to buy a new property and can repay the loan after the sale of your previous property. It is the most common use of bridging finance.

3. Property Auction

Auctions are a great place for spontaneity and opportunity, while it is both adventurous and exciting. Often it can mean that the buyers can purchase properties even when a montage agreement is not already in place. When you win an auction bid you have to pay a 10% deposit on that day and the remaining amount within 28 days. You can take out bridging loans to complete the purchase of an auction property within a given time frame.

4. Landlords Looking To Expand

It is expensive to build a property portfolio and many landlords rely on rent for the purchase of new properties. However, for landlords who are not willing to wait for a long time, a bridging loan can be a perfect solution for expanding their property portfolio. The amount can be repaid by refinancing to a long-term solution.

5. Solving Business Short term Cash flow Problems

There may arise cash flow problems when running a business. Such problems can occur due to different reasons, for example when customers are paying their invoices late or a bank may call for an overdraft facility. You can take a bridging loan to solve short term cash flow issues and can use this amount to pay wages or to purchase new equipment.

6. Repossession Prevention

If you are in a difficult financial situation where your property can be repossessed if you do not repay the debt. You can take a bridging loan to pay your debts and can sell your property on your own terms instead of forced sale. Other than these purposes you can use a bridging loan to pay a tax bill, Buy-to-let investment and divorce settlements.

Who offers bridging loans?

All the lenders do not offer this type of short term debt. These are not widely available from high street banks. Due to the flexibility and ease offered by bridging loans, more borrowers are taking such loans. Now a number of bridging loan providers and brokers are present in the UK.

You can get a loan from a direct lender or mortgage advisers. Investors now use bridging loan businesses to earn high-interest rates. Although bridging finance is quicker than traditional loans, lenders still conduct a thorough credit check and check mortgage commitments of the borrowers.

Alternatives to bridging loans

A bridging loan is a short term loan that comes with a high-interest rate that is why it is considered as a loan of last resort. It is better to get bridging loan advice from finance experts. There are many other options that you can consider instead of bridging loans to finance your property purchase. You can take out a personal loan or consider a remortgage.

Another low-cost option is an overdraft. However, it depends on whether you are thinking of borrowing the whole purchase amount or not. Furthermore, you can also use peer to peer loans for this purpose.

How Can We Help You?

Due to the growing demand for bridging loans, many loan providers are present in the UK. It can be challenging to find a loan at the best loan terms. We are here to help you in this situation. We provide you with a quick bridging loan comparison so that you can find a loan that matches your needs.

To get a comparison of the UK’s top bridging loan, follow these three simple steps:

About Your Property

Tell us about the type of property you want to use as collateral, address and postal code.

About Your Requirement

Tell us how much money you want to borrow and for how long.

Personal Information

Give us a few details about yourself, such as your name, address, phone number and email.