If you are considering a short-term loan to temporarily ‘bridge’ a gap in your finances, then depending on your circumstances, a bridging loan could very well be the solution. This article looks at what a bridging loan is and why it may be suitable for your needs.
What is a bridging loan?
A bridging loan is a fast method to borrow money for a short period of time, for example, if you are looking to buy a new property before you sell or complete a sale on your existing one. According to Finbri, depending on your circumstances, there are several different types of bridging loans to consider. The amount you can borrow will also vary, but typically brokers are able to offer anywhere between £20,000 and £5 million.
How do they work?
The two most common types of bridging finance arrangements are known as ‘closed’ and ‘open’.
Closed bridging loan
With this type of bridge finance, you will be required to make pre-agreed payments in line with the terms of the loan and will also be required to agree to an end or closing date for repayment. You are most likely to be offered a closed bridging loan if you have exchanged contracts on a property and are just waiting for the sale to complete and for the funds to be released.
Open bridging loan
An open bridge loan has no pre-agreed repayment date or exit strategy plan, although you will generally be expected to repay the loan within 12 months. You will most likely be offered an open bridge loan if you have not yet exchanged on your property. To be considered for an open type of bridge loan, the lender will want to see evidence of how you intend to repay the loan, such as a mortgage or equity from a property sale. They may also want to see details on the property you want to buy, including how much you intend to pay for it, and what steps you are taking to sell your current one.
First and second charge bridging loans
With bridging finance, if the security is your home then it’s likely a condition of the loan is that a ‘charge’ on the property must be applied. This charge is a legal agreement that indicates which creditors get repaid first, should you be unable to repay your debt. In this instance, your property will be taken as collateral.
The first charge on a bridging loan means it will be paid first, before any other secured loans on the property. You will be offered the first charge if you own the property outright or are taking out the bridging loan to pay off a mortgage in full.
If you still have a mortgage outstanding on the property, the bridging loan will be classed as a second charge. This means that the mortgage will be first to be repaid once the property is sold, with the bridging loan the second in line to be repaid from any remaining equity.
You are usually able to borrow more with a first charge loan than a second charge finance arrangement.
The cost of a bridging loan
As bridging loans are taken out for a short period of time, they are usually priced monthly rather than annually. This means that they tend to be more expensive compared to a longer-term loan such as a mortgage. Compared to a mortgage, you can expect to pay between 6% and 19% APR. You also need to take any additional set up fees – normally around 2% of the loan amount – into account.
Always get expert advice before applying for a bridging loan. Discussing your circumstances and requirements with a loan provider will ensure you fully understand the bridging loan process and what is required to complete your application and eventually exit the loan