How do bridging loans work?

How do bridging loans work?

Bridging loans are a form of short-term funding that can help you manage the gap between making a purchase and getting funds from another source, like selling a property. They are often used in property deals to help buyers complete purchases before selling their existing home. This type of loan is quick to arrange, but it’s important to understand how they work before you decide to take one.

Understanding Bridging Loans

Bridging loans are designed to help you cover costs for a short time. This is why they are ideal for property transactions. They let you buy a new home before you sell your old one. The loan is usually set up to last for a few weeks up to 12 months.

The loan is generally secured on one or both properties. The amount which can be borrowed is determined by the available equity in the security properties. On residential properties loans are available up to 75% loan to value. On commercial properties and land the loan to value is generally lower.

The loan is structured in such a way that the interest repayments can be rolled up into the loan and repaid when the loan is settled. The advantage of this is that it can help with the borrowers cash flow. It can also allow people to borrow money they can’t afford to service on a monthly basis. However, the amount of Interest is deducted from the gross loan so borrowers will receive less in hand from the loan proceeds.

These loans can be ‘closed’ or ‘open’.

Closed loans have a fixed end date. This is often used when you know when funds will be available.

Open loans do not have a set end date. This type of loan is less common requiring much more detail about eventual exit.

Costs and Interest Rates

The cost of bridging loans can be high. Interest rates are usually higher than for a standard mortgage. This reflects the short-term nature and risk involved in these loans. Interest might be charged monthly, or added to the loan to be paid at the end.

There are also fees to consider. These can include arrangement fees, exit fees, and legal fees. It’s vital to factor these into your planning to avoid surprises. See more information on the costs of Bridging Loans here

Application Process

Applying for a bridging loan is quicker than getting a mortgage. Lenders will still need to assess your credit and the value of the property. They will also look at your plan for paying the loan back. This is often from selling a property or getting a mortgage.

You will need to provide details about the property, proof of your income, and your exit strategy. The lender will use this info to decide if they can offer you the loan.

Pros and Cons

Bridging loans can offer a solution when timing is crucial. They can help you snap up a property quickly, without waiting to sell your current home. However, the costs are high, and the stakes are higher if your exit strategy fails.

On the plus side, the flexibility of bridging loans can make complex property chains or auction purchases much easier. On the downside, if your property does not sell, you face high-interest charges and potential debt.

Alternatives to Bridging Loans

If a bridging loan seems too risky or expensive, there are alternatives. These include extending your mortgage, taking out a personal loan, or borrowing from family. Each option has its pros and cons, depending on your financial situation and needs.

For instance, a mortgage extension can offer lower interest rates but might not be available as quickly as a bridging loan. Personal loans offer fixed interest rates but might not provide enough funds for all property prices.

People Also Asked

Are bridging loans a good idea?

Bridging loans can be a good option if you need quick funding and have a clear exit strategy. However, they are risky and expensive, so they should be considered carefully.

How fast can I get a bridging loan?

You can often get a bridging loan within a few weeks, much faster than a traditional mortgage.

What happens if I can’t pay back a bridging loan?

If you can’t repay the loan, the lender may take possession of the property used as security. This can lead to serious financial consequences.

Can I get a bridging loan with bad credit?

It’s possible to get a bridging loan with bad credit, but the interest rates will be higher, and you might need additional security.
More information on bridging loans with bad credit here.

Is it better to get a mortgage or a bridging loan?

This depends on your situation. A mortgage is usually cheaper but takes longer to arrange. A bridging loan is faster but more costly and riskier.