If you’ve ever found yourself struggling to pull together the funds to buy a property, while waiting for the sale to complete on an existing property, then you may already be familiar with a bridging loan. Available as a short term loan solution for those who need money to fund the purchase of a new property before they get the money from selling their former home, the main thing you need to know about bridging loans is that they are short term and should be paid off within a year unless otherwise agreed.
In this blog post, we go into detail about what a bridging loan is, how it works, and who it’s designed to help.
What is a bridging loan?
A short term, temporary loan which is designed to support those who are looking to purchase a property while waiting to sell their existing one, there are two main types of bridging loan available.
The first is called a ‘closed’ bridging loan, with the repayment set for a fixed date. This is the standard bridging loan available to those who have exchanged contracts on an existing home and are waiting for completion and transfer of funds.
The second is an ‘open’ bridging loan and offers a more open-ended approach, with no set date for repayment and the borrower generally given up to a year to repay the money.
Any lender will need to see evidence that you do indeed plan on paying the loan off quickly, generally in the form of proof that you are selling a property and a pricing strategy for the purchase of your new home or property including mortgage information.
There are bridging loans available outside of the property industry as well, for example in the business world where bridging loans can free up equity and boost cash flow. However, they are mainly used in the UK in the purchase of land, a new property, or to fund renovation work.
How does a bridging loan work?
When you apply for and take out a bridging loan, your loan will either be classed as a first or second-charge loan.
A first-charge loan means that if you fail to make repayments, the bridging loan is the first debt that will be paid off through assets and the sale of your property. This tends to occur only for those who own the property outright, as a mortgage lender is usually the default first-charge repayment receiver.
A second-charge loan means that the bridging loan comes second for another type of loan – generally a mortgage. If you fail to make repayments, the sale of your home to pay off your debts will first repay the mortgage and then the bridging loan.
Are there any costs?
As is always the case with any kind of loan, taking out a bridging loan comes at a cost – generally calculated with monthly payments due to the short term nature of bridging loans.
Setting up a bridging loan will typically cost around 2% of the full loan amount, with interest repayment rates of between 0.5% and 1.5% of the loan amount per month. In short, bridging loans may be convenient but they are pricey!
Who can apply for a bridging loan?
Anyone can apply for a bridging loan provided they are 18 or over and have a valuable asset that can be used as collateral – for example, a property.
To help you decide if a bridging loan is right for you, here are some of the benefits and drawbacks to consider.
Benefits of a bridging loan
- Quick and easy application, with bridging loans typically approved much quicker than mortgages
- Bridging loans can help you to finance purchases that a mortgage won’t cover
- You can borrow large amounts provided you pay it back within the agreed time period
- Most can be obtained without early repayment charges
- You can arrange your own repayment terms provided both parties agree
Drawbacks of a bridging loan
- Very high interest rates
- Additional fees can quickly increase your repayment rate
- Your assets are at risk as soon as you take out a bridging loan
If you think a bridging loan could be for you, find out more by getting in touch with a loan provider or lender. Not only will this kind of loan support your next purchase while you wait for a property sale to complete, but it can also help to finance major work – making it an efficient and effective, if costly, solution.