When someone is in the process of buying a property whilst selling another, it can be stressful and tricky to tie up dates of both transactions in a timely manner. Maybe you are buying at auction and won’t be able to find the funds in time, or you just need a loan to pay off a debt by a certain date; although they can be quite risky, there’s always the option for a bridging loan.
A bridging loan is a short term loan given to given to a person or company until they secure permanent financing. This allows the borrower to meet their current obligations by providing immediate financial aid.
Here are a few examples of when to use a bridging loan:
- You are in a property chain that has fallen through and you don’t want to lose your house of purchase.
- You are buying a property through an auction and need to raise funds quickly.
- When buying a property that is unmortgage-able and your plan is to make it habitable and rent it out so a traditional mortgage can be arranged.
Bridging loans are secure loans, with relatively high interest rates and backed by some form of collateral such as real estate o the inventory of a business. Due to the risk involved, bridging loans are sometimes known as a loan of last resort.
How do bridging loans work?
Unlike a mortgage, a bridging loan is not directly linked towards your income. You can take out a bridging loan from anywhere between £50,000 to £10 million but generally, the amount you can borrow depends the amount of equity you have available. A loan can be secured on the property or multiple properties to raise the required funds. The loan is then repaid either by the sale of the property or through the traditional mortgage route.
The advantages and disadvantages of a bridging loan.
Before taking out any loan, be sure to balance the pros and cons before you apply the bridging loan.
Advantages of bridging loans.
- You can quickly access the money to keep afloat any property transactions and obligations you have.
- You can borrow a large sum of money.
- Repayment terms are flexible and can fit within your plans.
- It’s possible to secure lending for properties that typical high street lenders may not.
Disadvantages of bridging loans.
- Bridging loans are a secured way of borrowing, meaning you will have to tie up an asset against the loan. If you can’t repay the loan then you rick loosing that asset.
- Higher interest rates accompany fast, convenient and flexible loans.
- Bridging loans can come with a variety of fees that add to their expenses.
Bridging loans and interest rates.
As previously mentioned, interest rates tend to be higher with bridging loans as that’s the price for convenient and fast money. Expect to pay between 6%APR to 20%APR depending on the size of the loan. This is a lot higher than most mortgage rates. And unlike a mortgage, there are 3 ways that the interest on a bridging loan is charged.
Costs of Bridging Loans.
Along with the interest rates, there are other fees included with taking out a bridging loan.
- Arrangement fee paid to the lender – typically 2% of the loan and added onto the loan.
- Legal fees – payable partly upfront to your conveyancing solicitor and the rest on completion.
- Administration fee – payable up front.
- Valuation fees – may vary in price but can be between £900 – £2000
- Broker fees – payable on receipt of the mortgage offer – from a £500 flat fee to a % of the loan.
Different types of bridging loans.
- First charge and second charge – Once a bridge loan has been taken out, a charge is placed upon your property. This is a legal agreement that lists the order the lenders will be repaid if you’3re unable to repay your loans. If you have an existing mortgage, the bridge loan becomes a second charge.
- Fixed or variable interest – Bridging loan interest rates can be fixed or variable. Like a mortgage, fixed rates mean you’ll know exactly what you’re paying each month. Variable rates mean your payments are subject to change.
- Open bridge loans – An open bridge loan means there’s no set date to paying off your loan, however they are usually expected to be paid off within a year.
- Closed bridge loans – a closed bridge loan means you have a certain time limit to pay off the loan.
Who offers bridging loans?
There are a number of high-street banks and private lenders that offer bridging loans. These banks include:
- Royal Bank of Scotland
To get a bridging loan you will usually need to work alongside a loan broker as most bridging loan lenders do not work with the public directly. High street banks have separate subsidiaries for handling bridging loans that are only accessible to brokers.