About Bridging Loans
The property market is growing rapidly and showing no signs of stopping, putting an increased demand on those wanting to purchase a property to complete as quickly as possible so they can secure the home they want. Many sellers are looking for buyers that can buy their properties without complications such as chains and mortgage applications. While it can be risky to purchase a new home without first selling the old one, sometimes it is the only option in order to get your dream home.
What is a bridging loan?
Bridging loans are specifically designed to bridge the gap between one form of finance to another. They are usually a short-term solution for covering the period between the sale of one property and completion date on another.
Mortgages and bank loans could also be used for this purpose. However, they provide a much slower service as the application processes are lengthy and funds take time to be released, unlike with a bridging loan. Bridging loans offer a simple alternative where applications are processed quickly, and funds can be released within a matter of days. Bridging loans are great for bridging the gap between a house sale and purchase, but property developers or auction buyers can also use them.
Bridging loans come with only two distinctive requirements; to be a property owner and over 18 years of age. The loan amount is determined and guaranteed by the value of the property, so usual criteria such as income and credit history are not as crucial to bridging loan lenders.
A lot of bridging loan lenders will consider those with a bad credit history, CCJs and even previous defaults and arrears because they use the property as collateral. The property you are buying doesn’t even have to be in a good condition and can be in need of renovations and repairs, which makes bridging loans a perfect option for property developers.
If the full loan amount is not repaid at the end of the loan period, the lender can repossess and sell the property to repay the debt.
What can I receive with a bridging loan?
As with most lending options, the size of the bridging loan depends on the lender and the borrower’s circumstances. Most bridging loan lenders will lend up to 70% of the property’s value, while some lenders provide as much as 100% bridging loans where additional security is provided, or the purchase is below market value. For most lenders the minimum loan amount is between £10,000 – £30,000. The majority of lenders don’t have a maximum lending amount for bridging loans as it is entirely dependent on the property value.
Bridging loans are available for anywhere between one day to 12 months, but as they are designed to be a short-term solution the maximum loan term is often 12 months.
When it comes to the costs involved with taking out a bridging loan, this can depend massively on the type of bridging loan you choose. Bridging loan lenders usually offer various interest rate structures including retained, rolled up and structured. Be sure to look into the various options available to work out which is right for you and your situation. As well as interest rates, bridging loans are subject to a lot of additional charges and fees including valuation fees, arrangement fees, legal fees, exit fees and broker fees. To get an estimate of costs use this bridging loan calculator.
Positives of bridging loans
- Funds applied for are released very quickly
- Many bridging loan lenders will base the loan on the property value as opposed to the purchase price
- Some bridging loan lenders will base the loan on the property’s development value, which is great for property developers
- Purchasing a property is made simple by eliminating chains and lengthy mortgage applications
- Buying a property with a bridging loan gives you the same benefits as being a cash buyer.
Negatives of bridging loans
- Bridging loans come with a high risk of defaulting, the high-interest rates and additional charges can be unmanageable
- As they are short-term and convenient, the interest rates and additional charges are high
- Most lenders require you to pay their legal fees as well as your own
- If you obtain a bridging loan, you often need to rely on a longer-term finance option as an exit plan
- Defaulting on a bridging loan will have a negative impact on your credit score.
If you are in need of fast funding for a property sale, whether it is for a property development, buy-to-let or personal use, a bridging loan could be the perfect option for you. Be sure to weigh up all your options before making a final decision and consult a broker to help you find the best deal on bridging loans. The range of additional fees and charges involved with this type of borrowing can make it confusing to navigate the best deals.