A bridging loan is one which tides you over for a short period, as opposed to a long-term loan like a mortgage. The common circumstance in which a bridging loan is needed is when you are buying a property, but haven’t yet sold another property or asset on which you are relying for funds. So the bridging loan may be for a large amount, but it will be for a short term. Once you have realised the value of your other assets, you repay the bridging loan.
Of course, this facility is not going to be much help unless it can be organised quickly, so a bridging loan should be capable of being put in place much faster than a mortgage. In this way problems caused by property ‘chains’ can often be avoided.
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There are two main types of bridging loans, regulated and unregulated.
The regulated type is monitored by the FCA (Financial Conduct Authority) and is usually extended to homeowners. The unregulated type is normally used by intermediaries, property investors and property developers to secure an investment or buy-to-let property or commercial real estate, and as such is not covered by the FCA, so you will need to consult an experienced specialist to find a suitable lender for this sort of bridging loan.
In addition, you often have the choice of an open bridge loan or a closed bridge loan. With an open bridge loan, you have no set end date. This means they can be repaid whenever your funds become available. They usually last for up to a year, but sometimes even longer. In contrast a closed bridge loan has a fixed end date, usually based on when you know you’ll have funds available to pay back what you owe. These are usually short-term bridging loans, lasting for just a few weeks or months.
Unsurprisingly, open bridging loans are usually more expensive than closed bridging loans because they’re more flexible. Whichever kind you choose, you need an ‘exit route’ – a way to repay your bridging finance.
In either case a specialist bridging lender will be used to the idea of having to work quickly, and will normally be able to complete an arrangement within a few days.
For most clients, speed will be the essential element, but the other main consideration will of course be cost. Make sure that the bridging loan lender you are considering is transparent as regards repayment structure, costs and the time involved.
A major consideration will of course be the cost of the loan. Before you start applying, consider these factors:
- How much you want to borrow. Lenders offer bridging finance from £5,000 up to £10 million and beyond.
- The value of your property, which will affect how much you can borrow and the bridge loan rates you’ll get.
- How long you need to borrow for: a bridging loan can be as short as a month, to as long as two years.
- Whether you have a mortgage on your property: this will also affect how much you can borrow through a bridging loan, and whether you can look at “first charge” or “second charge” loans.
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When you apply for bridging finance, the lender will adds a charge to the property you’re using as security. These charges set the priority of debts if you can’t repay your loan. For instance if a property were to be seized and sold to pay off your outstanding loans, a “first charge” loan would have to be paid first, before a “second charge”. A first charge loan applies where the bridge loan is the first or only borrowing secured against your property. A mortgage is typically a first charge loan, but if you have no mortgage on the property, a bridge loan could be your first charge loan.
A second charge loan normally applies when there is already a loan or a mortgage against the property, and second charge lenders usually need the permission of the first charge lender before they can be added – though there’s no limit on how many charges can be added on a property.
All these factors can affect the cost of your bridging loan. Bridging loans are normally priced monthly rather than annually, because people tend to take them out for a short period, and of course they are relatively expensive; typical fees could be around 0.5 percent and 1.5 percent per month, or 6.1 percent and 19.6 percent APR – much more than a conventional mortgage.
There will also be a setup fee to take into consideration, usually around two percent of the loan you want to take out – so it’s essential that you know before you go into a bridging loan arrangement, when you will be able to pay it off. From there it’s just a short hop to your dream property!
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