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What is a bridging loan and is it right for me?

May 23, 2021
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Chains are a nightmare for sellers and buyers. If you have to wait for your home to sell before you can buy your dream home, you will be familiar with the stress of trying to make everything fall into place at once.

Perhaps you want to buy a property at auction but are concerned about getting the funds in place in time?

Or perhaps your buyers aren’t ready to complete, but you need to move forward with the purchase of your next home?

A bridging mortgage could be the answer. Here’s what you need to know before moving forward:

What is a bridging loan or bridging mortgage?

Bridging loans are short-term loans that are often used to purchase property. They can be helpful if you need to access cash quickly, but only for a short period of time.

This type of loan will bridge the gap between purchasing a new property and selling your current property. This type of loan could also be helpful in the following situations:

  • If you are buying a property that does not meet the requirements for most lenders, for example, no bathroom or kitchen. The loan would give you time to renovate and then apply for a traditional mortgage.
  • If you are buying a property at auction. You will need 10% of the property value on the day of the auction and then the rest is typically due within 28 days.
  • If you want to release equity from your mortgage, pay a tax bill or buy your partner out of your home after a divorce.
  • If the seller specifies cash buyers and wants a fast sale.

Bridging loans explained

There are two main types of bridging loans. These are:

  • Closed bridging loans. This type of loan will have a fixed repayment date. You would use this mortgage type if you have exchanged contracts with a seller but are waiting for the sale to finalise.
  • Open bridging loans. This type of loan would be used when you don’t have a fixed date, perhaps because you haven’t found a buyer for your existing home yet. This could also be used to “flip” a property by purchasing it cheap, renovating and then selling for a profit. This type of loan will typically have to be paid off within one year.

What is a short term bridge loan?

To put it simply it is a bridging loan. Either closed or open.

Should I choose a fixed or variable rate loan?

Just like a traditional mortgage, you will have a choice between fixed and variable rate loans. A fixed-rate loan will secure the interest rate for the lifetime of the loan, while a variable rate loan will be linked to the lender’s interest rates. This could mean you end up paying back much more – or much less. A variable rate loan will have additional risk attached.

How much can I borrow for a bridging loan?

This will vary between lenders. You could borrow anything between £30,000 and £50 million. The amount you can borrow will typically be linked to the value of the property, with lenders offering an LTV of 65-80%. You may be offered less in certain circumstances. If you can provide additional security, you may be able to secure a 100% LTV.

What is a first and second charge bridging loan?

First and second charge bridging loan determines which loan gets repaid first if you default. When you secure a bridging loan, a charge is placed on the property. If you have a mortgage on your home and you are unable to keep up with the repayments, your mortgage would be repaid first. This is riskier for lenders, as they might not recoup the full amount, so they typically don’t offer as much through this route.

If you own your home outright, you could take out a first charge bridging. This means if you are unable to keep up with the payments, your bridging loan would be paid off first. This gives lenders a little more reassurance, so a 100% LTV bridging loan is more likely.

When will I get the money?

Bridging loans are much faster than a traditional mortgage application. The decision will take between 1-2 days and then you should have your funds in around 2-4 weeks. This will vary by lender.

What else should I consider before taking out a bridging loan?

The most important thing to remember is that bridging loans are typically more expensive than a mortgage. This means higher fees and additional admin fees. By working with a specialist broker, you can explore all of the options available to you before moving forward.

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