Bridging Loans

Are you looking for short-term funds to help you secure that new home? EveryInvestor’s comprehensive guide on everything you need to know about bridging loans.

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Are you looking to move homes and need some quick cash to help facilitate your move?

Well, you can try checking out bridging loans. They’re short-term solutions to short funding gaps. You can use these loans to help facilitate purchasing an estate that you wouldn’t be able to buy otherwise.

Unlike other loan types, bridging loans are more costly since they have high-interest rates (the loan providers assume that you’ll quickly pay off your debt).

What is a Bridging Loan?

Bridging loans¹ (or ‘bridge loans’) are designed to help you buy a house. They assist in bridging the gap. So, if, for instance, you want to buy a new home before selling your old one, you can apply for the loan, get funds to move, and then repay when you get the funds. You can also take out a bridge mortgage if you’re selling on quickly after renovating or need to purchase an estate at an auction.

They’re also for landlords and inexperienced estate developers. If you also need a mortgage fast after buying at an auction, the bridge loan mortgages types are your best option. They’re also used by the wealthy and asset-rich persons who are looking for straightforward lending on residential estates.

In as much as they’re the best short-term finance options, you also need to consider some risks. Most financial institutions and building societies are less likely to lend after the current economic crisis, meaning that there are now more bridge loan lenders than ever. They charge you high bridging finance rates plus hefty admin fees, so you must be aware and cautious so that you don’t get ripped off. The bridging loan expenses can be up to 1.5% a month, which comes to about 18% a year.

How Do Bridging Loans Work?

There are two types of bridge loan financing, the open and closed bridging loans.

It doesn’t what type of loan you opt for. Your lender will need you to provide them with proof of a precise repayment plan, like using the equity from your property sale or taking out a mortgage. They’ll also expect to have evidence of the new estate you want to purchase and the amount you’re planning to pay for it, as well as proof of what you’re doing to sell your current home or residential property if relevant.

It would help if you always remembered to have a backup plan in case things don’t go your way.

Where Can You Get Bridging Loans?

There are various types of bridging lenders – from individual plan providers to larger, professionals regulated by the city watchdog, the FCA².

If you love structure and are looking for a straightforward lender, ensure that you use an FCA-regulated broker since they’ll only recommend taking out a bridging loan if it’s your only and best option available.

Things You Need to Consider When Taking Out a Bridging Loan

Various accountants have different responsibilities. Nonetheless, there are three distinctions you need to know and choose, based on the needs of your company:

Since you only take out bridging loans for a few months, most lenders tend to place high bridge loan rates on them – meaning that a small difference in the interest rate³ can have a significant impact on how much your loan costs in the long run.

Varying Interest Rates

There are three main ways that providers use to charge bridging finance interest. Depending on your agreement, they can charge you monthly, which means that your loan amount will remain constant.

There’s also the deferred or rolled up interest that involves paying it all at the end of the loan term. The third type is the retained interest, which consists of borrowing for a specific amount of time and paying at the end of the loan term.

Generally, taking a home equity loan is less costly than a bridging loan. However, bridge loans have better perks for some borrowers. Moreover, most plan providers won’t offer you the home equity loan if the property is on the market.

Prospective Issues

Financial institutions are taking longer to process claims for substantial home loans. There has been a constant increase in the number of people opting to take out bridging loans rather than the standard home equity loans.

While they’re highly useful when you use them for property investments, acquiring buy-to-let estates and developments, they can cause a myriad of issues for lenders. Therefore, it’s essential to recognize that bridging loans aren’t the most straightforward or most ideal alternative to mainstream lending.

Taking a bridge loan can also lead to future rejections when you want to take a mortgage. It can also rake up some hefty additional legal and administration fees. Therefore, you need to tread cautiously when taking out bridging loans. You should also ensure that your circumstances are suitable to apply for the bridge loan.

How to Get the Best Bridging Loan

When you decide to take out a bridging loan, you need to ensure that you consider the following:

The Amount You Need

You should set up a budget and know how much money you need. Lenders today are offering bridge loans with a minimum limit of €5,000 and a maximum of €2.5 million.

The Estate Value

It would help if you had an accurate and up-to-date assessment of your property as it’ll affect how much you can take and how much it’ll cost.

The Loan Period

A bridging loan can last between one month and over two years. So, knowing how long you’ll need to repay it is essential. It’ll help you determine whether you should take the closed or open loan.

Mortgage

If your mortgage out your estate, it means that your borrowing amount will be affected. It’ll also determine if you’re liable for the 1st charge or 2nd charge loans⁴. You can only take out the 1st charge loan if you don’t have any outstanding borrowing amount attached to your property.

Frequently Asked Questions

Everything you need to know about bridging loans.

How long does it take to receive the loan payment?

When it’s approved, you’ll have the funds within two weeks. If you, however, need it urgently, you can pay some additional funds to speed up the process.

What if you have bad credit?

Some lenders will still consider your application even if you have bad credit. However, it would be best if you prepared for your eventual loan to be more costly.

What is the difference between the open and closed bridging loans?

The closed loan involves a set exit or repayment date, while the open loan meaning borrowing for an extended period. It doesn’t have any set exits or repayment dates. With that said, the closed option tends to be less costly.

How long does it take to apply for a bridging loan?

Applying for the loan can be fast. You can apply it online and find out if you’ve been successful within 24 hours.

Do you have to be a homeowner to take out a bridging loan?

A bridge loan is a secured loan, meaning that you have to offer them an asset as your security. Some plan providers accept land as security, instead of an estate.

How does one know if they need a 1st charge or 2nd charge loan?

If you have an existing mortgage or loan on your home, you need to take out the 2nd charge loan. Otherwise, you can take a look at 1st charge loans.

Contact us about your goals or if you need to chat to a financial adviser.

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