What is a Bridging Loan?
Bridging loans are a means to temporarily ‘bridge the gap’ between the purchase of property and securing funds, such as from a mortgage or the sale of another property.
They are a short term secured loan for between 12 and 24 months depending.
For this reason, it may not be for everyone.
So, when is a bridge loan a good idea?
Bridging loans can be a good idea if:
- You want to buy a property quickly but haven’t yet sold your current property.
- Your buyer has dropped out, but you don’t want your new property purchase to fall through.
- The property you want to purchase is currently inhabitable or un-mortgageable i.e. a property split into flats being converted back.
- You’re planning development or a self-build.
- You’re buying at auction.
- You need short term funds without the monthly interest payments.
How do bridging loans work?
Bridging loans are quick, flexible products and perfect for those who are on a restricted timeframe. They’re also available on a range of properties.
Things you need to know:
- You’ll need a larger deposit of around 25%.
- You must provide evidence of how you intend to pay back the loan, i.e. a repayment vehicle such as the sale of a property or re-mortgaging.
- Due to the high risk involved and short term, interest rates tend to be higher than on a mortgage.
- There are no monthly payments unless you choose to make them. You’ll pay a bridging loan back at the end of your terms. However, as well as paying the initial loan you’ll pay the monthly interest that rolls up which will have interest charged to it.
If a bridging loan is something you are considering we’d be happy to put you in touch with a specialist advisor who can walk you through your options.
How do 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.
To qualify for bridging finance you’ll mainly be assessed on the value of the property. Depending on the lender this could be based on the actual price you paid or on its true market value. In cases where the property needs significant development, seeking a lender who will lend based on its true market value (once renovations have been completed) will be of significant worth.
The other imperative part of your application will be the exit strategy or repayment vehicle, how you will pay the loan off at the end of the term? It might be that you secure a remortgage or sell the property. It needs to be a sound strategy as without one it can be near impossible to secure finance.
Other things you’ll need to be aware of:
- You’ll need a larger deposit usually over 25%, which is higher than a mortgage will be.
- Typically, you’ll only be allowed to borrow a loan to value (LTV) maximum of 75%.
- Due to the high risk involved and short term, interest rates tend to be higher than on a mortgage, between 0.5 – 1.5% per month.
- There are no monthly payments unless you choose to make them. You’ll pay a bridging loan back at the end of your terms. However, as well as paying off the initial loan you’ll pay the monthly interest that rolls up.
- There are additional fees you will need to consider that will vary depending on the lender.
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 like a lengthy process, the reality is that this could all be completed within a week.
Are bridging loans a good idea?
As bridging loans are a short-term finance choice, they may not be for everyone. They do also carry a certain level of risk because of the extra costs so you will need to weigh up what you will get out of opting for this type of loan.
So, when is a bridge loan a good idea?
Bridging loans can be a good idea if:
- You want to buy a property quickly but haven’t yet sold your current property.
- Your buyer has dropped out, but you don’t want your new property purchase to fall through.
- The property you want to purchase is currently inhabitable or un-mortgageable.
- You’re planning development or a self-build.
- You’re buying at auction (see also our auction finance article).
- You need short term funds without the monthly interest payments.
There are alternatives though, you could check for remortgaging options, or if you can’t sell you could convert to a let-to-buy.
Speaking to a specialist advisor about potential bridging finance can be vital. As we’ve said, these loans do come with risk and an experienced advisor will know the market inside out and can find you the best deals possible or alternative options based on your individual 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.
