A bridging loan is a loan used to bridge the gap between paying for a purchase and waiting for cash from the proceeds from an asset sale.
The first crucial thing to remember when contemplating a bridging loan is that it is a secured loan, which means that the lender must have a high-value asset to put up as collateral, such as land or property.
What a Bridging Loan is Used For
Bridging financing can be used for a variety of purposes. These are some examples:
- Purchasing a Home
- Real estate development
- Investing in buy-to-let properties
- Ventures in business
- Making a tax payment
- Settlements in divorce.
Property developers also employ bridging loans to acquire properties at auction. This is because they typically need to pay a deposit to guarantee their purchase on short notice.
The Two Main Types of Bridging Loans
An open bridging loan and a closed bridging loan are the two types of bridging loans. These two kinds of bridging loans work in the following ways:
Open Bridging Loan
An open bridging loan has no set expiry date and can be repaid when the funds are available. Within these limitations, open bridging loans often last a year and sometimes more.
Closed Bridging Loan
A closed bridging loan has a set termination date. Loans of this type are often based on the date the borrower knows they will be able to repay the money, and they are typically short term, lasting only a few weeks or months.
Open bridging loans often charge higher than closed bridging loans, owing to the greater flexibility they provide to borrowers.
Interest Rates of Bridging Loans
Bridging loan interest rates are often relatively high. They might vary from as an example only 0.4% to 2% per month. Please note these are not representative rates but examples only.
. However, the rates depend on the bridge lending facility you end up with. The interest rates are calculated every month instead of an Annual Percentage Rate due in part to the loan’s short-term nature. The following are the three most common ways of charging interest on bridging loans:
- Monthly – you pay the interest every month, and it is not added to the bridging funds.
- Deferred- there are no monthly interest payments made. Instead, all interest is payable after the bridging loan.
- Retained – interest is borrowed for a set length of time and then repaid after the bridging loan.
Other expenses associated with bridging loans may include an arrangement fee, an exit fee if the loan is paid off early, legal fees and appraisal fees.
The Difference Between First and Second Charge Loans
You’ll obtain a first charge bridging loan if the property you’re financing the loan against has no previous loans secured against it. However, a second charge loan will apply if you already have a debt against the property, such as a mortgage.
What to Consider Before Applying for a Bridging Loan
Before you begin comparing bridging loans, there are a few things you should consider. They are as follows:
The Amount You Want to Borrow: Bridging financing is available from lenders ranging from £5,000 to £10 million and beyond.
Your Home’s Value: The value of your home influences how much you may borrow and the bridge loan rates you’ll receive.
How Long You Need to Borrow: Bridging loans might range from one month to two years.
Whether You Have Mortgage on Your Property: The amount you may borrow through a bridge loan is affected by whether or not you have a mortgage on your house. It also influences whether you can consider first or second charge loans.
Conclusion
The most significant takeaway is that bridging loans are costly financial options and are only designed to provide a short-term cash source. If you want a longer-term loan with more attractive rates, you should consider other business loans or invoice financing.
A Move Broker is one of the leading mortgage advisers in Chester capable of connecting you with the most competitive deals from lenders we have a good relationship with for a fast and fuss-free financing experience. We are also highly experienced in arranging mortgage bridge loans and work closely with our extensive connections to find the right solution for you. Get in touch with us today for a free initial consultation!
This article is for information only and should not be seen as advice or a recommendation to act.
Some forms of commercial bridging loans are not regulated by the financial conduct authority
As a mortgage is secured against your home or property, it may be repossessed if you do not keep up the mortgage repayments.