How Does A Bridging Loan Work?

How Does A Bridging Loan Work?

- in Bridging loan, informational blog

A bridging loan is a type of short term loan. It is a secured loan and taken out for a short time during which expected funds are arranged, or longer-term finance becomes available. This type of loan is used to finance the gap when you want to purchase something but wait for funds to be available by selling another thing. It is a secured loan which means you have to use your valuable assets as security to get a loan. Most people take a bridging loan to purchase a new home while their existing property is on sale. Let’s take a closer look at how a bridging loan works. 

How does It work?

A bridging loan is most commonly used for the purchase or investment in property. For instance, if you want to buy a new home, you need some funds to complete the purchase by selling your old home. It may take a long time to sell your old home because of formalities, or you may not find a buyer. To avoid the delay in the purchase of new property, a bridging loan can be a perfect solution. With a bridging loan, you can borrow money against your old home and can use this amount as a payment for a new home. As soon as the sale of your old home is completed, you can repay the loan amount. 

Uses Of A Bridging Loan

Usually, a bridging loan is used to purchase a property, but it can be used for other purposes as well, including:

  • Refurbishment of a property to sell it quickly
  • Purchase of property at auction
  • Property development
  • Paying a tax bill
  • Purchase of a property that would not secure a mortgage in current condition
  • Buy to let investment. 

Types Of Bridging Loan 

Bridging finance is of two different types, which are as follows:

  • Open Bridging Loans

This type of bridging loan does not have a fixed end date. If you need funds before finalising your property’s sale, you should go for an open bridging loan. Borrowers who need open bridging loans are considered high-risk borrowers because they are unable to provide a date of when their home is sold, and they will pay the entire loan amount. However, normally the borrowers have to repay the amount within a period of one year. Open bridging loans are expensive because of flexibility. 

  • Closed Bridging Loans

A closed bridging loan is different because it has a fixed repayment date. You can provide a fixed date only when you know the date by which your existing property will be sold. Thus this loan is suitable for borrowers who already have finalised the sale of their property. Therefore, such borrowers are less risky to the lenders and require less equity. 

No matter which types of bridging finance you choose, you must know an exit route that is a way to repay your bridging loans. 

 How Much Does A Bridging Loan Cost?

As bridging loans are types of short term loans, they are an expensive way of borrowing. Taking a bridging loan can add cost to the existing mortgage you are paying. The interest rates on bridging loans are floating and higher than the fixed interest rate loans. The interest rate usually ranges from 0.4% to 2%, depending on the lender you choose. However, you do not need to pay interest every month. You can take a rolled up deal in which you have to pay all the interest at the end of term. Or you can select a retained interest deal in which you also borrow the amount needed to cover the interest rate, and at the end of the loan term, you will pay it all back. 

Different fees are also added to the final cost of the loan, such as administration fees, valuation fees, exit fees, arrangement fees, legal fees and broker fees. So, you have to keep it in mind before you decide whether a bridging loan is right for you or not. 

How Long It Will Take To Get A Bridging Loan? 

It is quite easy and quick to apply for a bridging loan. Once you decide to take a bridging loan and find a lender after price comparison, you can complete your application process online. Typically, the application is approved within 24 hours. After the approval, money is transferred to your bank account within two weeks. It takes a longer time to have your property valued, and the lenders complete the validation process. 

If you need funds sooner, you may have to pay extra to process your application faster.

To get a bridging loan at competitive rates, you must compare the bridging loans providers. You can visit our comparison page to find the best bridging loan providers in the UK.  

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