A bridging loan is a short-term funding option which is helpful in a range of situations, whether buying or extending a property, or buying a business.
The term refers to a type of loan taken out to solve temporary cash problems to “bridge” the gap between a large debt being due and you receiving money.
For instance, if you own a house but are upsizing to a more expensive property, a bridging loan could cover you to buy the house you want before you have sold the first one.
Similarly, if you are buying a property at auction, you may need to put down a deposit or pay the balance on a house quickly before a mortgage lender can arrange finance.
Depending on the lender, a bridging loan can often be taken out by people who usually find it more difficult to get loans and mortgages. This includes people with bad credit ratings and those who are self-employed.
Borrowers can typically apply for a loan between £30,000 and £10 million, although the amount of money granted will be based on what you are looking to purchase, and the market value of the assets.
How quickly do I get a decision?
Usually, a bridging loan can be arranged and completed within a couple of days. A decision on a loan can be made within a couple of hours of the request being made.
Is a bridging loan like a very short mortgage?
Not quite. Because of the extra risks, bridging loans are more expensive, and they should only be considered as an option if you think you can repay the loan relatively quickly. The key with these is to move fast: a short-term bridging loan can be an ideal financial solution, but it could complicate matters if you cannot repay it quickly.
How do bridging loans work?
Usually, bridging loans are based on the value of the properties involved less any existing mortgages. A maximum of £500,000 is usually fixed, although some lenders will go higher. The loan is normally repaid within six months, but it can be agreed to last as long as necessary.
How much do bridging loans cost?
The price of bridging loans differs according to the type of land or property it is being used for. They are generally set at a fixed interest rate, usually a percentage of the overall value per month.
Usually, a consumer would be looking to incur costs of between 1.1 per cent and 1.5 per cent, although if the client has a bad credit history it is likely to be higher.
Normally with this type of loan, it is necessary to move quickly, and borrowers don’t shop around for the best rate. However, in theory variations in rates will be available from different lenders.
Don’t forget that as with all loans, you are likely to have to pay certain fees. A valuation fee and an agreement fee will often need to be paid, so factor these in to your outgoings.
Getting a bridging loan for a property auction
When buying a house from a property auction, be it to occupy or rent out, it is necessary to complete the deal within 28 days. Some companies offer a specific service to cover this, providing non-status loans especially for auction transactions. These companies often have no minimum loan period and no early redemption penalties, but interest rates can be higher.
Where do I get a bridging loan?
Some high-street banks offer bridging loans, although it can be faster to choose a specialist bridging loan lender. They can deal with the request quickly, often within a week or so, depending on other aspects of the process.
The point of bridging finance is its rapidity. The entire process should take no longer than 10 days, but it could even be quicker if there are no problems at any stage.
How do I get a bridging loan?
It is important to have the property that your loan will be secured against valued quickly. The lender will conduct this valuation, and as soon as it has been paid for, the process will begin. As the borrower, it is up to you to convince your solicitor or conveyancer to carry out all the conveyancing tasks as fast as possible.
What types of bridging loan are there?
You can have a bridging loan for residential or commercial developments, residential or commercial property, mixed use property, owned land, owned retail properties, owned offices.
The different types carry different criteria for eligibility, as well as different costs.
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