Bridging Loans Explained
What is a Bridging Loan?
A bridging loan (or ‘bridge loan’) is a loan which allows you to borrow money for a short period, usually up to one year. It can help to ‘bridge the gap’ to secure funding to buy a new property quickly. For example, bridging loans can help homeowners purchase a new home while they wait for their current one to sell. In this situation, your existing home will be used as collateral.
What can I use a Bridging Loan for?
A bridging loan is useful if you are:
- Searching for short-term financing if you are buying property at an auction
- Paying for renovations before resale or acquiring land for development
- If you have found a new house without selling your current one, a bridging loan can cover you so you get the new home you want.
- In a chain of homeowners looking to purchase new homes and a buyer pulls out, a bridging loan can close the loop so the sales go ahead
- Purchasing a new business with a shortfall in funding
- A business owner looking for working capital
- Receiving a large tax bills
Is a Bridging Loan a good idea?
It’s a fantastic option for short-term periods where quick and easy finance is required. However, bridging loans aren’t designed to be a long-term solution, and so aren’t a good idea for when you need finance for over two years. The benefits of a Bridging Loan are:
- Funds are available very quickly
- Interest rolled-up and paid on completion
- Lenders are more open-minded about borrowers with bad credit histories
- There are no exit fees for early repayment
- Avoid wait times due to property chains
- No repayments to make during the loan
How do Bridging Loans work?
Bridging loans are different to re-mortgages as they are not dependent on income, but are backed by the value of the property you own and/or looking to buy. Typically interest rates are higher than other loans & mortgages as the interest is charged monthly, however these do not have to be paid until the end of the term when the borrower has secured permanent financing.
There are two types of bridging loan: ‘closed’ and ‘open’.
Closed Bridging Loans – With a closed loan, there is a fixed repayment date – you will normally be given this kind of loan if you have exchanged contracts but are waiting for your property sale to complete.
Open Bridging Loans – With an open loan, there is no fixed repayment date, but you will normally be expected to pay it off within one year.
Whichever kind of loan you take out, the lender will want to see evidence of a clear repayment strategy, such as using equity from a property sale or taking out a mortgage. They will also want to see evidence of the new property you are purchasing and the price you plan to pay for it, as well as proof of what you are doing to sell your current property if relevant.
How much is a Bridging Loan in the UK?
Many factors affect the kind of bridging loan rates you could get from a lender. If you want to take out a bridging loan for a house purchase, the lender will calculate the loan based on the value of the property you currently own and/or are looking to buy. Lenders of bridging loans will give an amount based on the maximum loan to value (LTV) amount, which is typically up to 75%.
How long will it take?
Funds can be raised much quicker than a typical Mortgage application , typically between 3-4 weeks though Friends Capital have raised funds quicker than this .Depending on your property`s valuation and the amount required it may not be necessary to wait for a physical valuation or to go through a complicated legal process.
How do I pay back the loan?
You pay back your bridging loan at the end of a set term, usually when you sell your house and typically within 12 months. Interest is calculated monthly, but you will need to show that you have a way to pay back the bridging loan at the end of the term. This may be when you sell your old home or by refinancing with a traditional mortgage.
If the bridging loan is for property development, with the intention of adding value to properties, the loan can be repaid when the house sells, or the loan can be repaid by arranging a buy-to-let mortgage.
How much can I borrow?
You can borrow up to £10 million with Friend’s Capital, but the amount you can borrow is calculated against the property’s value or properties if you have several properties. The calculation of how much you can borrow is called the loan to value. Friends Capital will provide a quote based on the LTV, which can be up to 75% of the property’s value or properties.
Friends Capital are mortgage and loan specialists. We are one of the UK’s leading brokers, with over 30 years of experience. Friends Capital work with all of the UK’s top financial institutions, bringing you the very best the market has to offer. We’ll find the perfect solution for your needs, clearly explaining the pros and cons of different options.