Types Of Bridging Loan
There are two types of bridging loans that you should know as a potential borrower.
- Open Bridging Loan
- Closed Bridging Loan
“In this article, we are describing the uses of bridging loans and their pros and cons so that it can be easier for you to decide whether you should take out this loan or not.
There are several pros and cons of bridging loan when compared to other types of borrowing. Let’s take a close look at the bridging loan overview, types and uses.
Bridging loan is a short-term debt designed to bridge the gap between two situations, usually the purchase of a property before another sale. It is also known as a swing loan or caveat loan. In recent years a great expansion and growth have been seen in the bridging loan market of the UK.
However, some people still do not know what exactly is bridging finance and for which purpose they can use it. Another important thing that you may want to know is the benefits and drawbacks of bridging loans.
Suppose a family wants to move to a new or bigger home, they have found the right home for them, but the sale of their existing property has just fallen through. Now, if they do not commit to buying a new home, they are in danger of losing it. In addition, they already committed upfront payment for a survey, mortgage and other fees.
Bridging loans are secured loans, and you have to use your property as collateral until you repay the loan amount. Bridging finance is different from mortgage loans, and the primary difference is due to loan terms.
A standard bridging loan has a loan term between one to 18 months, while a mortgage can stretch up to 30 or 40 years. Normally, people use bridging loans when it is not possible to secure a mortgage loan.
There are a number of benefits of bridging loans when compared to other types of borrowing. Let’s take a close look at the benefits that you can get from bridging loans.
Moreover, commercial bridging loans are mostly unregulated and are extremely fast to arrange compared to other loans. As there is no regulatory burden, lenders are free and fragile to approve loans for property investors where deals depend on the availability of funds the speed of finance.
In traditional borrowing, you have to pay an interest rate, usually on a monthly basis. While in bridging loan, the repayment of interest rate can be catered according to borrowers needs. You can choose to repay it monthly or at the end of loan terms. Usually, the interest is repaid as “retained interest“, which means the cost of interest is added to the total amount borrowed. It is more beneficial and affordable for companies that are concerned about ongoing cash flow.
The borrowers can secure against any type of property, including flats, shops, apartments, mixed-use properties, offices, complexes or care homes. You can also use a property as a security if it is in poor condition or considered as unsuitable for a mortgage. Moreover, if you want to take out a huge sum of money, you can use more than one property as collateral to take out a loan.
Mortgage loans are usually available as a first charge loan, while you can take a bridging loan as a 2nd or 3rd charge loan. It means bridging finance can sit behind loans that are already in place.
One significant benefit of bridging finance that attracts borrowers is it can be used for any legal purpose. At the same time, traditional loans limit borrowing for specific purposes and do not offer any flexibility. As long as you have an intelligent exit strategy, lenders do not mind for which purpose you will use the money. Thus there is a lot of flexibility and ease when it comes to bridging loans.
Most traditional property and business loans require a good credit score along with concrete security. However, no status bridging loans are available in the market that only focus on the potential profit of the deal. Thus the individuals who can not qualify for other forms of finance can also get funding through bridging finance.
As long as you have sufficient security in place, you can get a 100% bridging loan. However, only a specialist group of lenders offer this type of loan, so you have to check with your lender whether they are offering a 100% bridging loan or not.
The majority of bridging loan lenders earn profit through arrangement fees and interest rates. It prevents borrowers from paying heavy exit fees if they want to make early repayment of the loan.
Along with a number of benefits of bridging loans, there are some disadvantages that you should keep in mind before availing of such finance.
Bridging loan rates are usually higher than the standard bank loans. It approximately ranges from 1 to 1.5% it means it will be 12.68% to 19.5% per year. On the other hand, the annual interest rate on traditional mortgages is usually 5%. From this comparison, you can see how costly a bridging loan is.
Bridging loans for residential properties come with protections and regulations similar to conventional property loans. However, commercial bridging loans are currently unregulated in the UK. No doubt it speeds up the approval of loan applications, but the borrowers do not have any resources for the protection of FCA.
When you take out a bridging loan, there are a number of fees that will add up to the cost of a bridging loan. Usually, you have to pay arrangement fees that are around 1.5% of the loan amount. Other than that, you have to pay a broker fee, administration fee, late repayment fee, valuation fees and some legal fees. All of these changes increase the cost of borrowing.
To take out a bridging loan, you need to use your valuable asset (property) as security. It is impossible to qualify for a loan if you do not have a property with enough equity to use as security against the loan amount. If you fail to repay the loan amount on time, the lender has a right to sell your property to get the loan amount. It means there are chances of repossession of your property.
There are two types of bridging loans that you should know as a potential borrower.
Bridging loans are a great alternative to mortgages for individuals and businesses who want to purchase a property but need quick funding. Most commonly, bridging loans are used by property investors to bridge the gap between property purchase and arranging long term finance.
Other than that, there are many reasons for which a bridging loan can be used. Some of the uses of bridging loans are as follows:
Sometimes a property is considered unsuitable for a mortgage, for example, if it is in poor condition or when a buy to let or residential property does not have a proper kitchen or bathroom.
Bridging loans are available on such properties, which are unsuitable for securing a mortgage. Moreover, some property investors or homeowners want to improve the value of their property before the sale.
Therefore, they can take out the bridging loan for the renovation of a property so that they can get a good sale value.
Auctions are a great opportunity for property investors or landlords who want to expand their portfolios. At the auction, properties are usually sold below their market value, but it is a time-limited opportunity.
Typically you need to pay a 10% deposit on that day and the training amount within 28 days. Bridging loans are set up quickly and can be used to purchase properties at an auction.
Businesses can use bridging loans to fulfil their current financial needs. Cash flow problems can arise anytime when running a business.
Business owners take out bridging loans for a number of purposes, such as for purchasing new equipment or paying daily wages.
Due to quick arrangements bridging loans can be used to pay tax bills on time and avoid penalties.
Although bridging finance is a specialist type of funding that provides the best borrowing method in terms of speed and cost, it is always better to explore all the available options.
For example, if you are taking out a bridging loan for repayments of your mortgage, you must talk to your mortgage lender before taking out a bridging loan.
It might be possible that your lender offers you another date for repayment or lower repayments until your financial situation improves.
If you are trying to sell your property but during this time, you find a new home. Instead of taking out a bridging loan, you can change your current mortgage to buy to let mortgage and rent out your property meanwhile searching for a good buyer.
You should need to do your homework to know how much rental income you need to cover the cost of your mortgage. Businesses can take funds through invoice financing or asset refinancing rather than taking out a bridging loan.Other alternatives of bridging loans include commercial mortgage, development finance, secured loans and asset loans.
Now that we have described the benefits and drawbacks of bridging loans, we hope that now you can make an informed decision on whether a bridging loan is the right option for you or not.