What Is A Bridging Loan For Property?
A bridging loan is different from a regular mortgage. It is designed to be used over short period of time and is intended to assist you whilst you find longer term finance for your needs. Many loans of this type are used when people purchase a property before the completion on the sale of their existing home. A loan may also be granted to allow you breathing space to re-finance and consolidate several debts.
There are two kinds of loans. A ‘closed loan’ has a fixed date of repayment. An ‘open loan’ has no fixed repayment date but is unlikely to run for more than one year. Most bridging loans are offered for a term of between one and eight months and interest is built into the total sum which is payable in full at the end of the term. This means no monthly payments during the term of the loan.
Why Would I Need A Short Term Loan?
Bridging loans can be useful if you want to secure the purchase of a new property but have not completed on the sale of your current home. This kind of loan can also be used if you happen upon a rare property that is liable to be sold quickly and you wish to secure the purchase. Additionally, if you are buying a property at auction and need to pay the full amount before the regular mortgage starts you can use a bridging loan as a stop gap.
Who Is Eligible For A Bridging Loan?
If you own a property you could be eligible for a short term loan of this type. Each applicant is assessed on their individual circumstances but the general criteria is based on ability to repay the loan. Therefore, you must have a strategy for repaying the loan either through re-mortgage or the sale of a property.
Most mortgage lenders will also ask for a clean credit record although some will lend if there is some adverse credit history. Your credit record can affect what interest rate you are offered. Applicants with long term experience in property deals may be considered a lower risk.
How Does A Bridging Loan Work?
A bridging loan works in a similar way to other loans. However, due to the short term of the loan the interest rates are higher than normal mortgages. Rates are calculated monthly and there is normally a set up fee priced in as a percentage of the loan. The lender will assess the interest rate to be applied using your individual circumstances.
For houses with no outstanding mortgage, the lender will take out a ‘first charge’ against the property which means that they are top of the list to get their money back after the house is sold. If you have an existing mortgage on your home, the new loan will be a ‘second charge’ which means the original lender has priority for repayment.
Bridging Loan FAQ
What Can I Use A Bridging Loan For?
A bridging loan can be used to develop a property or to buy a property outright. You can also use a short term loan to finance a business venture or pay an outstanding tax bill. If you want to buy an auction property you can apply for a bridging loan which can be arranged quickly.
How Much Can I Borrow Using A Bridging Loan?
Lenders will advance 100% of the property price if the applicant can provide sufficient security of repayment. In other cases lenders will apply a loan-to-value quote and this may be between 65% and 80% of the price of the property you are buying. Amounts between £5,000 and £250 million are available as long as the value of the secured property covers the loan amount.
Is It A Good Idea To Have A Bridging Loan?
As long as you are confident that you can make the full repayment on time, a bridging loan can be a useful tool. The rate of interest will be higher than that on a normal loan. However, the short time period and fast access to funds can make a bridging loan very useful under the right circumstances.
Do I Need a Deposit To Have a Bridging Loan?
In some circumstances a lender will advance 100% of the cost of a property. This usually means you need to show extra safeguards to secure the payment of the loan. This might be in the form of other properties in which you have equity or that you own outright.
If you are buying a house at auction and cannot supply this extra security the loan may be granted on a loan-to-value basis and you will need to provide a deposit.
Are There Alternatives To Taking Out A Bridging Loan?
If you are looking for an alternative type of loan and own your property outright, you could consider changing over to a buy-to-let mortgage. In this case you could re-mortgage your current property under buy-to-let terms and then use the released equity to purchase a new property.
For smaller amounts you could take out a personal loan of up to £50,000 and this might work out cheaper as interest is calculated annually instead of monthly.
What Are Interest Rates On A Bridging Loan?
Interest rates change very quickly and you can find up to date figures by contacting your bank or lender. However, a typical rate could be between 0.50% and 1.05% monthly on a loan amount of between £50,000 to £500,000. These rates are for a loan-to-value of 75%. This means you would need to provide a deposit of 25% of the value of the property.
Finding The Right Short Term Loan For Property
It is important to find the right kind of loan for your needs. You can use a comparison website which will provide you with current rates and the terms and conditions attached to the loan. Take time to look at rates and decide whether a fixed rate or variable rate of interest is better.
Having a fixed rate loan means you know exactly what amount will need to be repaid but the rate might be higher than the base rate. A variable rate loan can be cheaper depending on the bank base rate. However, if there is a sudden spike in the money markets you could end up paying back a higher amount than that which was originally calculated.
The Pros And Cons Of A Bridging Loan
There are several advantages to taking out a short term bridging loan. The funds can be quickly secured and you can borrow higher sums as long as the security for repayment is in place. Loans can be flexible with either fixed or variable rates and a there are a range of terms. Some lenders will advance 100% of the property price.
The main disadvantage to a short term loan of this type is the risk of losing ownership of your property if you are unable to make the repayment of the loan on time. There are also fees attached to the application and higher interest rates will apply. Bridging loans are also classified as unregulated unless they are secured against a property occupied by the applicant or their family.
An unregulated loan does not have the protection provided by the Financial Conduct Authority. This organisation ensures that the terms and conditions of loans are 100% transparent and that applicants fully understand the risks attached to the loan.
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