Is a bridging loan right for you?
At The Online Mortgage Guru when it comes to finance and mortgages to buy your property, we always say that what is right for you will very much depend on your individual circumstances.
So how do you know if a bridging loan is the right idea for you?
We’ve written several posts about bridging loans: A Guide to Bridging Finance and Bridging Loans and Bridging Loans Explained.
In this article, we’re going to take a step back and look at some examples which may help you determine whether or not this kind of finance is right for you.
What is a Bridging Loan?
If you’ve not read any previous articles we’ve written on the subject, let’s recap.
A bridging loan is an interest-only, short-term loan which is used to help with the purchase of a property.
Typically, they are accessible up to 75% of the property’s value. The loans are available on residential, development, and commercial properties and can be taken out for up to 24 months (and sometimes on land).
They are a means to temporarily ‘bridge the gap’ between purchasing a property and securing funds for it.
Key differences between a bridging loan and a mortgage
Loan terms
This is one of the biggest differences between a bridging loan and a mortgage. Bridging loans are short-term finance and will have a repayment plan of about 12-24 months. Most standard mortgages, however, have repayment terms of about 25 years.
Application times
The decision-making process for a bridging loan is substantially quicker than a mortgage application. Often a lender’s decision on a bridging loan application will only take a few days.
Interest
One of the advantages of a bridging loan is that interest repayments can be delayed until the end of the loan term. This option is not normally available on mortgage loans.
Loan to Value Rates
Whilst both bridging loans and mortgages are based on loan-to-value rates (LTV), you’ll find that there is often a higher LTV rate on bridging loans when compared with a standard mortgage.
Exit Strategy
A typical mortgage will be paid off through the term length of the loan, this is your exit strategy. However, a bridging loan requires you to have a mapped-out exit strategy to pay off the loan. These are proposed on the application.
Property Type
Lenders can have certain criteria to which a property must meet certain standards. Unfortnately having a non-functional kitchen or bathroom, or structural concerns can mean offers are declined for a mortgage. However, bridging loans are more flexible in their criteria.
Is a bridging loan right for you?
With all this in mind, is a bridging loan right for you? We’ve got a couple of examples that may offer some further guidance.
Example 1 – Downsizing
A couple is taking steps to downsize from their four-bedroom family home to a two-bedroom bungalow.
They’ve found the two-bedroom bungalow they want and are moving in having put a deposit down and an agreement in place to purchase in the next 6 months.
Moving out of their four-bedroom family home meant they could complete the refurbishments it needs and secure a buyer.
However, they need short-term finance to cover the gap between the sale of their four-bedroom family home and purchasing their new property.
They had time in hand and were looking for the best rate, not necessarily a speedy loan. With a longer timeframe available, the market can assessed for the best lending rates available.
Example 2 – Broken chain
A family has found the perfect property they want to move into and is well within their budget. They’d also had an offer accepted on their current property so felt comfortaable to put in an offer on the new property.
However, the buyer pulled out of the purchase of their home and put the chain and the purchase of their new property in jeopardy.
They needed a short-term loan to keep the chain intact and keep the purchase of their new property the schedule.
A bridging loan was put in place, secured quickly against the property for sale and the home they had made an offer on to ensure they had the asking price.
Their exit strategy was simple, the sale of their current home would repay the loan.
Example 3 – Auction property
A client purchased an auction property which needs some refurbishment. Time is limited when you purchase at auction, and long-term forms of borrowing can be harder to arrange within such tight deadlines. They need to raise half the purchase price to secure the property.
They can with a secured bridging loan, secured against the property for 6 months.
The client has an exit strategy of refinancing to a buy-to-let mortgage. When that buy-to-let mortgage is complete the solicitor uses the funds from the buy-to-let mortgage to repay the bridging loan.
How much does a bridging loan cost?
There are some good bridging loan deals out there.
Interest rates will vary and can seem fairly high. However, the duration of the loan must be considered to calculate the overall cost.
As an example, a 12-month £300,000 bridging loan with a monthly interest rate of 1.5% would cost you £4,500 a month in interest and equate to a final total of £354,000 (not including any other fees i.e. arrangement fees, legal fees and valuation fees).
Where can I get a bridging loan?
Bridging loans aren’t generally offered by high street lenders anymore and those that do offer them will have strict criteria as to who they will lend to. The most effective way to find a lender would be to speak to an independent broker who has access to the wider market and an understanding of this type of loan.
Bridging lenders frequently work directly with brokers as well as through specialist distributors who can help you locate the best deal from a variety of lenders. They are bridging finance professionals with strong ties with lenders.
Once you’ve spoken to a broker and you’re provided with options best suited to your circumstances you will need to apply. From there the process may look as follows:
- Valuation of the property
- Assessment of your application and credit checks
- Loan approval
- Solicitors will be placed to deal with conveyancing and charging the property
- Funds will be released once the solicitors are satisfied
Although it seems lengthy, the reality is that this could all be completed within a week.
Fees can drastically affect the entire cost of the loan, so be sure you understand exactly what you will be paying upfront, at redemption, and if you are unable to pay.
Speaking to a specialist advisor about whether a bridging loan is right for you is important. Experienced advisors will know the market inside out and can find you the best deals possible or alternative options based on your circumstances.
Contact us at Online Mortgage Guru on 0345 3669799 or email us via info@theonlinemortgageguru.co.uk and we’ll help you understand whether a bridging loan is a viable option for you.
