Location matters a lot when it comes to bridging loans. Although these loans are popular in other countries, they are also available in Ireland. The demand for these loans is small and acts like any other small loan. Therefore it is crucial to get to the basics of these loans – what they are, how they work and when you should use them.
According to experts, bridging loans are misunderstood products, so many people choose not to use them. Despite not gaining much popularity, the demand for these loans in Ireland has significantly increased this year due to increased property prices.
What is a bridging loan?
A bridging loan is a short-term loan used to bridge the gap in funds when purchasing a property when the sale of the current property has not been made yet. This kind of funding prevents you from missing out on your dream property just because you are facing some delays in the sale execution of your existing property.
Understand it by an example. Assuming that you own a flat worth €300,000 on which you have an outstanding mortgage worth €150,000. Now you have fallen for another flat worth €500,000. The seller has made a condition that you will have to complete the purchase within six weeks.
You check your savings and find that you can only pay the stamp duty and other associated fees, but you need more money to buy the house. So, you decide to borrow €500,000. No lender will approve your application if you both do not have enough earnings. In this situation, you have an alternative of taking out a bridging loan.
Are bridging loans expensive?
The repayment length of bridging loans is usually not more than 12 months. It can be longer than it in some cases, but that is very rare. Funds can be arranged in a few days, making these loans the fastest.
As far as it is about the money you can borrow depend on the lender’s policy, your current financial circumstances, and the valuation of the property. However, the least amount you can borrow is €25,000. There is no upper limit to how much you can borrow. It is entirely upon a lender’s discretion.
This seems very exciting. You can borrow a significant amount of money and get rid of the debt within a short period, but the fact is that these loans are extremely expensive. You are not just supposed to pay the interest but arrangement fees and exit fees. Other fees may also include valuation fees, administration fees, broker fees, and legal fees.
Arrangement fees will cost 1 to 2% of the total loan value, which is charged when you get the loan. Interest rates for bridging loans are normally fixed. However, some lenders may put you on a variable option.
How much you pay in interest will depend on several factors:
- the size of the loan
- the repayment term
- your credit score
- The LTV (a value of the property that a lender believes the property will be worth when the development project is completed)
It is to note that all lenders do not charge exit fees. If your lender charges the exit fees, you will likely have to pay them when the principal amount is paid back. Like arrangement fees, exit fees are calculated based on the percentage of the total loan, but it may still vary.
When it comes to bridging loans, you are supposed to choose between the two repayment methods. You can either roll up interest or select retained interest. Choose the one that suits your current financial condition.
If you choose the former option, you will add the interest for the entire loan to the capital. Some borrowers use this option to defer interest payments, but this will prove very expensive. This is because interest will accrue each month, making the total loan size bigger.
As the name suggests, the retained interest method allows a lender to maintain the interest for a full term of a loan. It means that if your bridging loan is supposed to last for 12 months, you will make payment at 12 months, but rather at the end of the term in a lump sum. Note that the total interest could be more than the monthly arrangement.
What are the risks associated with bridging loans?
Bridging loans have some benefits, one of which is that they are the fastest loans. The approval rate is higher and quicker than traditional loans and also comes with some drawbacks. They require more extensive payments. It may only be possible for some borrowers to pay off the debt on time.
Because the amount is significant and the repayment term is at most 12 months, you will have difficulty keeping up with more considerable payments. If you fall behind in payments, more interest will be charged, and you will have to pay late payment fees.
You may get the nod for bridging loans, but your business is at risk if you end up with debt higher than your income. You may lose real money. You can also find yourself submerged in debt if you choose a disappointing project to invest in.
If you need some money to fund the gap, it is recommended that you seek alternatives. If you need a small amount of money, you can seek loans with no credit check in Ireland. Depending on the amount, these small loans will be paid in fixed instalments.
If you need a large amount of money, you should consider taking out a personal loan. However, it is still suggested that you borrow money carefully. If you fail to repay the debt, you will have to face serious consequences.
The final word
Bridging loans are available in Ireland, but they could be more popular. However, the demand has increased slightly due to the recent increase in property prices. These loans can be an ideal solution when you have fallen short of funds, and your existing property takes some time to sell. However, make sure you weigh up the pros and cons of these loans before taking them out.