What is a Bridging Loan?
A Bridging Loan or “Bridge Loan” is a short-term, high-interest rate loan designed to help those looking to complete on their property purchase prior to selling their existing home. They offer short-term finance before your longer-term funding - the funds from the sale of your previous home - comes through.
Buying a house can often be a lengthy and complicated process. This is especially the case when someone is selling and buying at the same time. A variety of factors can hold up the buying and selling process including property chains, the conveyancing process or concerns flagged in a survey. In some cases, buyers can often find themselves in a position where they have found a home to purchase, before the sale completion on their existing property. This is where Bridging Loans come in.
In this article, Compare My Move give you all the information you need to understand what a Bridging Loan entails, how they work and what they cost. We will also look into the logistics of using a Bridging Loan so that you’re prepared when it comes to applying for yours.
Bridging Loans Explained
A bridging loan bridges the gap between buying a new property and selling your previous home. This is a short term option that comes with high interests rates. These loans are ideal for homeowners who are struggling to find a buyer for their existing home but are looking to complete on the purchase of their new property.
As a result, the person(s) taking out the bridging loan would, for a short time, own two properties. These can especially help those looking to sell their original property quickly. However, it does mean that they will have a large amount of secured debt if it takes a long time to sell their existing property, if a buyer withdraws or if the home is sold for less than expected.
Bridging loans are suitable for:
- Buying a house at auction
- Buying land for development
- Buying a currently inhabitable home (for converting, for example)
- Paying for renovation work on your new property
Advantages And Disadvantages Of Bridging Loans
Below we’ve created a table of the top advantages and disadvantages of a bridging loan:
|Advantages of a Bridging Loan||Disadvantages of a Bridging Loan|
It can be a lifeline in the buying and selling process
It has a swift application process
Flexible borrowing available
The loan is secured against your property
How Does A Bridging Loan Work?
There are two types of Bridging Loan available, a “closed” bridging loan and an “open” bridging loan. The closed bridging loan will require you to know exactly how you intend to pay off the loan. This means letting the lender know exactly what funds will be used to pay off the loan from the get-go, also known as an “exit plan”. These type of bridging loans are usually settled within a matter of months.
An open bridge loan does not require you to state how you’ll pay off the debt nor what your “exit plan” is. This type of bridging loan is best suited for those looking to obtain funds for an urgent transaction, such as an upcoming property purchase. In this case, you will usually have up to a year to repay the debt.
When taking out either of these bridging loans, a ‘charge’ will be placed on your property. This acts as a legal agreement which prioritised which lenders should be repaid first in the event you fail to repay your loans. In this case, your property would be taken as security.
These charges are known and first and second-charge bridging loans. If you still have a mortgage on your current property, the bridging loan will be a second-charge bridging loan. In the event you failed to meet repayments on your loans, the house would be sold to pay off debts and in this case, the initial mortgage will be paid off first.
However, if you own the property outright, the bridging loan would be a first-charge bridging loan and would be repaid first in the event you failed to meet your repayments.
How Much Can You Borrow with a Bridging Loan?
Depending on the lender, it is possible to lend upwards of £25,000 and in some cases as much to £25m or more. However, keep in mind that lenders will usually only let you borrow a maximum loan-to-value ratio (LTV) of 75% of the value of your current property. Also, you are more likely to be able to borrow more if you are taking out a first-charge loan.
In light of the effect of COVID-19 on the housing market, Market Finance Solutions (MFS) has launched a £60 million COVID-19 recovery fund, set aside to quickly finance bridging loans for those looking to complete on a residential or commercial property transaction before the end of 2020.
How Much Will A Bridging Loan Cost?
The interest rates on Bridging Loans are notoriously high, so paying them back as soon as is possible is recommended. Bridging loan rates can be between 0.5%-1.5% per month, resulting in an equivalent annual percentage rate (APR) of between 6.1% and 19.6%. These figures are far higher than many, if not most, mortgages.
In addition to a potentially staggeringly high APR, Bridging Loans also come with set-up fees, usually around 2% of the loan you are looking to take out. This further adds to the overall cost of buying a house, which includes conveyancing fees and the price of the relevant house survey. Before considering a Bridging Loan, ensure you are both financially prepared and in a position to pay the loan off as soon as possible.
It is possible to pay the interest on bridging loans in several ways including on a monthly basis, where you pay the interest separately and this amount isn’t added to the overall loan. You can also pay it in a “rolled-up deal”, paying the compound interest in full along with the loan itself when repayment is due.
The other option is retained interested where the monthly interest payments are covered until a date agreed upon between y
How Do I Get A Bridging Loan?
Loan providers will need to consider a few factors before deciding if you are eligible for a bridging loan. Some loan providers may only offer a bridging loan to customers who are also getting their new mortgage from them. This isn’t always the case, but it is worth keeping in mind.
Depending on the loan and the establishment providing it, loan providers will usually require property as security. The provider may also require the person taking out the loan to own more than one property to qualify.
In order to apply for a Bridging Loan, you may need to show proof of income and, if there are commercial aspects to your plans and purchases, the provider may want to see a business plan. This is also the case if you plan to develop the property, the loan provider may ask for your track record in property and developments before considering you for a loan.
Due to the fact that those applying for a bridge loan are likely to be making payments for two houses, the best candidates for these type of loans will need to have a history of managing credit responsibly. This will mean having an excellent credit score.
How Long Does A Bridging Loan Take?
Obtaining a bridging loan can be a very swift procedure, although exactly how much time it will take will vary from lender to lender. Usually, a decision will be made within 24 hours of your application being submitted.
Following this, there will be approximately two weeks (again, depending on your lender) where the necessary checks and balances will need to be processed, alongside property valuations and the money transfer.
Is There an Alternative to a Bridging Loan?
If a Bridging Loan isn’t for you, there is another option. If you are in a position where you can’t sell but have found a new home, one option is considering a let-to-buy mortgage agreement. This also will require planning and consideration as it involves remortgaging your current home.
By remortgaging to a buy-to-let mortgage you can use the equity released to buy your new property. If this is something you want to consider, arrange to speak to your mortgage lender about your options and eligibility.
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