Are you having trouble pushing into your new house, but cannot because your current home didn’t sell? You are not alone. Everyone wants to climb the ladder quickly to achieve the goal on time. However, buying another property upfront without selling the current one is challenging.
You may not have that much cash ready. So, here comes the bridging loan. It is a financial facility that helps you buy another property without selling your existing one. It is a short-term loan used primarily for the purchase of commercial and residential properties.
What do you mean by bridging loans?
Bridging finance is a rather direct short-term budget that serves as a “bridge” to fill a gap in a borrower’s need. Until longer financial support can be obtained. So there are 2 kinds of bridging loans – closed bridge and open bridge, prior to drawdown of the loan.
One needs to pay short-term bridging loans within 12 months with fixed interest and terms. If you want, you can repay the interest later. You can make only principal payments until the loan repayment term. You need to have an existing method to get the loan. It is about how you will repay the dues on a bridging loan. It is a secured finance solution; therefore, having an exit strategy is important.
When should I use a bridging loan?
A very common misconception is that bridging loans are used only when purchasing property at auctions. This type of facility is used for the purposes that can be utilised in other scenarios too.
You can use the bridging loans for the following purposes:
- Heavy refurbishment
- Buying another commercial or residential property;
- Buying property at auction
- Developing buy-to-lets to rent
A bridging loan enters the scenario where traditional banks and societies fail. It is because they may ask the borrower to repay the dues before the property sale. It is simply impossible in some cases. With bridging loans, you can repay the dues from the sale of the property later.
How does a bridging loan work?
Bridging loans do not work like any other loan in the UK. It is a type of secured loan that’s exclusively used for purchasing, renovating and investing in a property. Here is how it works:
Step 1- Identify the need
It is important to know when you must use the loan. Here are the three common conditions where a bridging loan may help:
- You want to buy a new one before the sale of the property
- You are downsizing and relocating, but funds are tied up in the current property
- You need a temporary finance solution to complete a property purchase
Step 2- Apply for a loan
You may approach a bank or a specialised lender, and you must provide:
- Details of the property being sold
- Details of the property that you want to purchase
- Proof of equity
- Evidence that you can repay the loan, usually through the property sale
Step 3- Loan assessment and Valuation
You can carry out valuations on both properties. Confirm that there is sufficient equity in your current home. Moreover, check your repayment plan, which is typically the sale proceeds of your old property.
Step 4- Loan approval and drawdown
Once approved, the lender releases funds to let you buy the new property before you sell the old one. The bridging loans last for about 6-12 months. However, some loan providers may provide the loan for 18 months.
Step 5- Repayment of the loan
You can repay the quick loan when the home sells. You can then either switch to the normal mortgage for your new property or own it outright. It depends on your finances.
Step 6- Interest and costs
Bridging loans are more expensive than traditional mortgages. Thus, you may face higher interest rates. It often remains 1.5% per month, depending on the lender. Check the possible arrangement fees, valuation fees, and legal costs. Some loan providers allow interest to roll up. It is added to the rolled-up balance.
How much does a bridging finance cost?
Bridging costs vary depending on the security type, the loan term, and the borrower’s credentials. The interest rates may change according to the property stake, the amount needed, and the creditworthiness. You may get bridging finance at an interest rate of 0.5%-2% per month. The loan arrangement fees may also vary from 1-3%. Moreover, the loan-to-value ratios may be up for some property types.
For example, the cost of a bridging loan would be higher than the equivalent loan secured against a typical family home in an established residential area. Moreover, the final cost of the loan depends on the broker having access to the market. It helps you fetch the best deal for your finances and affordability.
It is an ideal arrangement for an individual with a poor credit history. You can get a bad credit loan for bridging finance. It is because it is a secured loan, so more emphasis is on the asset provided. You may get better terms on the loan.
How long can you use a bridging loan for?
Bridging loans are seen as a short-term loan solution. The terms may run from one month to 3years. The borrowers may save interest and maintenance fees by exiting quickly. However, you must design your finances accordingly to repay the dues timely.
Most bridging lenders are keen to be repaid as quickly as possible. They might re-circulate their funds by supporting another borrower. Some loan companies offer open-ended loans where the loan repayment term is not certain. You can repay or clear the total dues whenever you can.
Why choose short-term bridging loans?
If you want to consider a bridging loan, then you must have any of these needs. Here is what you need to check.
- It helps you get the funds within 24 hours
- You can use the funds for unauthorised or discarded properties
- Buying the property at auction
- Use the funds for renovation and refurbishment
- Helps you bridge temporary financial gaps
Bottom line
These bridging loans help purchase or renovate properties. You can get one if you have a property to stake and can afford the loan repayments. The loan does not last for long. Thus, this quick way to get debt-free makes it one of the popular solutions. Identify the risks, implications, terms and usage before applying.
