What is a bridging loan?
A bridging loan provides the ideal solution for those looking to borrow money for a short period of time. It can help you bridge the gap (hence the name ) between buying a new house and selling your old one. Bridging is often used by people who urgently need money to buy a property at auction before having sold their own property.
How do bridging loans work?
There are both ‘open’ and ‘closed’ bridging loans.
Closed bridging loans – With closed loans, the repayment date will be a fixed date. If you have exchanged contracts but are waiting for your property sale to go through, you can use this type of loan.
Open bridging loans – There is no fixed repayment date with an open loan, however, you will usually have to repay it within one year.
Regardless of which loan you go ahead with, the lender will always want to see clear evidence of a repayment strategy – e.g. taking out a mortgage. Additionally, they will want to see proof of the new property that you have plans to purchase. You will also need to provide evidence of how you are planning on selling your current property if applicable. It’s always good to have a back-up plan just in case your repayment strategy falls through.
What are first-charge and second-charge bridging loans?
A ‘charge’ will be put on your property when you take out a bridging loan. This is a legal agreement which prioritises the lenders who will be repaid first if you miss a payment. Usually, if you still have a mortgage on your property, the loan you are allocated is a second charge loan. This means that if a repayment failed, and your property was sold to pay off your debts, your mortgage would be the first thing to be paid off. If you have already fully paid for your property or have taken out a bridging loan to pay back your mortgage, you would be able to take out a first charge bridging loan. This would mean that the bridging loan would be paid back first if you got behind with payments.
How much will a bridging loan cost?
People tend to take out bridging loans for a short period of time, so they are priced monthly instead of annually for this reason. One of the disadvantages of a bridging loan is that they are considerably more expensive than normal residential mortgages – typically fees range between 0.5% and 1.5% per month. A comparable APR on a bridging loan is between 6.1% and 19.6%. You also should keep in mind that there will also be set-up fees to take into consideration.
How much can I borrow with a bridging loan?
Depending on the loan provider, the amount lent could be between £25,000 and over 25 million pounds. Usually, you can only borrow a maximum of 75% of the value of your property. With a first-charge loan, you can usually borrow more than a second-charge loan.
What are the alternatives to a bridging loan?
If you are intending to move, but aren’t able to sell, you could think about getting a buy-to-let mortgage on your property. This is done by remortgaging your current property to get a buy-to-let mortgage and use the equity from that to purchase your new property.
If you would like to talk to someone about whether or not a bridging loan is right for you then do not hesitate to call us on 033 000 20010 or complete an enquiry form here: https://costs.greenjellyfish.co.uk/contact/