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Bridging loans
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What is a bridging loan?
A bridging loan can be used if you need to make a purchase before you’ve sold what will fund buying it.
It bridges this gap until you’re able to make the sale.
They’re a type of secured loan, so you’ll usually be required to use your home (or another property you own) as collateral.
Who are bridging loans for?
Typically, they’re used for purchasing properties.
For instance, if you’re looking to purchase a house before you’ve sold your own. This could be because there’s a lot of interest in the property you want to buy, but yours is struggling to sell, or a buyer has pulled out. Buying at auction also requires a deposit to be put down to secure the property, so they can be used for this, too.
An example would be if you want to buy a property with a deposit of £80,000, but you only have £20,000 in savings to put towards it until your home sells. You can take out a bridging loan for £60,000 to secure the purchase of the new property.
They can be used for other purposes too, like divorce settlements.
Types of bridge loans
There are two types of bridging loan:
Closed bridging loan
You’re given a fixed repayment date. This is an option if you’re certain the funds will be released by a fixed date. For example, if you’ve exchanged contracts on your property and have a completion date. Closed bridging loans are for very short-term borrowing, usually only lasting a few months at most.
Open bridging loan
There’s no set date to repay the loan by, but the term will still usually only last up to a year. They can be useful if you have an interested buyer but are yet to exchange contracts, so there’s a chance it could fall through.
Open bridging loans will be more expensive than the closed options because they offer longer terms and greater flexibility.
Variable and fixed-rate bridging loans
You can choose between a fixed or variable-rate bridging loan.
Variable rate – As a bridging loan is a form of short-term borrowing, changes in variable rates shouldn’t affect you greatly. This type of loan tends to follow the Bank of England base rate and can go up as well as down
Fixed rate – As the name suggests, the interest rate will remain the same throughout the loan term
First charge and second charge bridging loans
This isn’t a fee to pay – the ‘charge’ actually refers to the priority of debts to be paid off if you can’t make your repayments and your home is repossessed.
The money made from the sale of the property will be used to repay your outstanding debts that are secured against it. A first charge debt will be paid off first, followed by the second charge debt, and so on (you can have more than two).
Generally, your mortgage will be the first charge loan on your property, and then a bridging loan would be the second charge. If you don’t have a mortgage, then the bridging loan could be the first charge.
It’s worth noting that you require the permission of the first charge lender before taking out a second charge debt.
How to get a bridging loan?
If you’ve decided that a bridging loan is right for you. All you need to do is tell Bridging Compare about:
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Your home
Type of building and address
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The required loan
How much you need to borrow and for how long
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Yourself
Details like your name and email address
Is a bridging loan right for me?
This will very much depend on your circumstances. If you’re certain that you’d be able to pay off the bridging loan on time, and can keep the term as short as possible, it can be a good way to fund your next property purchase.
For those who may be a little more uncertain of when the funding to pay off the loan will come through, perhaps if your house sale has fallen through multiple times due to problems found in the survey, they’re best to be avoided. The fees and interest can easily spiral out of control, leaving you with a huge amount to pay off and the possibility of losing your home.
What can bridge loans be used for?
A bridging loan could be used for:
- Buying a property
- Purchasing a buy-to-let investment
- Buying property at an auction
- Funding renovations until you’re able to remortgage
- Covering the cost of purchasing land for property development
- Divorce settlements (sometimes referred to as a divorce loan)
Pros and cons
The advantages of a bridging loan are:
- Quick access to a lump sum of cash
- Ability to loan large amounts of money – up to £25 million, depending on the circumstances. This will typically need to be less than 80% of the loan-to-value ratio (LTV) of your property, although in some cases it may be higher
- Flexibility if you choose an open bridging loan. There’s no set repayment date, which can be a relief when house sales can be so unpredictable
Watch out for:
- As with any secured loan, if you fail to make your repayments you risk losing your home
- They’re a lot more expensive than a standard mortgage, with high interest rates
- You’ll be subject to a number of fees that can really add up. This could include set-up, solicitor, valuation, exit and drawdown fees. Some of which are charged as a percentage of the amount you’re borrowing rather than a flat rate
How to compare bridging loans?
Compare bridging loans as you would any other type of borrowing.
You’ll want to look at the interest rate, which can be high with this type of loan. Interest will be charged monthly, rather than annually.
Next, you’ll want to look at the fees, and there may be a few to watch out for. These will be charged as a percentage of the loan amount, so if you’ve borrowed a large amount, it can be an extremely expensive way to fund your next house purchase.
Alternatives
Before applying for a bridging loan, consider:
Personal loan – You may be able to borrow up to £50,000, depending on your income, employment status and credit score, which will need to be excellent if you want a loan for a larger amount.
Unlike a secured loan, there’s no risk of losing your home, but you’ll still need to make your repayments in full each month
Peer-to-peer loans – This is where individuals invest their money into a platform which then lends money to different borrowers, so you’re not lending from a bank or building society. This type of loan is regulated by the Financial Conduct Authority (FCA)
Remortgaging – You can release equity from your current property, and therefore money, by remortgaging. This could be a good option if you want to purchase a buy-to-let property.
It will take longer than applying for a bridging loan, between four and eight weeks, but it’s a cheaper way to borrow