A bridging loan is designed to fill the void between funds coming in and expenditure being due. It is designed to be a short-term solution to finance, aimed at keeping transactions such as property purchases alive when delays in income being received could cause the transaction to fail.
Bridging loans are either closed or open and whether a closed or open loan is appropriate depends upon the circumstances. A closed bridging loan may be appropriate if the transaction is progressing well and a completion date has been set. This completion date can also be the date at which the closed loan is to be repaid. An open bridging loan will be more flexible as a repayment date will not be set, although it is often expected to be paid off within a year. Flexibility comes at a cost, however, so you will usually find open bridging loans to be more expensive.
With all types of bridging loan, you will be required to demonstrate where the repayment will come from, referred to as an exit plan. In most cases, the exit plan will involve taking a mortgage or selling a property. As with all lenders, information should be provided about the value of the property being sold, if applicable, and the purchase price of the new property. If the reason you need a bridging loan is that your property is not selling, the lender will also want to see what efforts you are making to expedite the sale and repay your bridging loan.
Consider whether a bridging loan is right for your circumstances or whether an alternative source of finance would be better. It is always worth getting advice from a professional and if you do decide to take out a bridging loan then carry out a bridging loans comparison to find the one which best meets your needs. Bridging loans are designed to be a short-term solution, which makes them an expensive finance option.
Interest is usually charged on a monthly basis, which means that a small change in interest rate can make a huge difference in the amount which will actually be paid. The monthly rates can translate into an annual percentage rate (APR) of up to 19.6%, which is far higher than a mortgage.
Some lenders allow you to pay interest in one go at the end of your loan or you can add it to a monthly payment, whatever you find suits your circumstances better. There will also be set up fees and exit fees for early repayment to consider before settling on a bridging loan, so be sure to find out what these are and note them as part of your bridging loans comparison exercise.
Bridging loans are secured against your property as either a first or second charge. If you have a mortgage, then the mortgage will be the first charge, but if the bridging loan is the only finance secured against your property then the bridging loan will be the first charge. A charge is a legally binding agreement which states the order in which lenders will be repaid if you do not keep up with repayments.
Lenders will be repaid by selling the property, so you are at risk of losing your home if you do not make the repayments on your bridging loan as agreed. Bridging loans can be secured for as little as £5,000 but the maximum amount varies between lenders. If your bridging loan is a first charge loan, then you are likely to be able to borrow more than if you have an existing mortgage as the loan to value (LTV) percentage is usually capped at 75%.
You may also be offered the choice of fixed or variable interest on your bridging loan. If you opt for a variable rate, it may be lower initially, but it is set as a certain percentage above the Bank of England base rate and can thus go up and down over the term of the loan. You may prefer to choose a fixed rate instead to allow you to budget for repayments that will not change.
As you compare bridging loans on the market, you will see what is available, what the fees and interest rates are and whether you have an option to choose between fixed and variable interest.
You might be considering a bridging loan if there is a danger you might lose the property you are hoping to buy as a result of not being able to sell your current property and raise the funds for the purchase. However, rather than considering general guidance on the subject, it is always a good idea to obtain advice from a professional based on your individual circumstances.
There are sometimes alternatives which might suit you better depending on the amount you need to borrow and what you need the funds for. Bridging loans are not only considered as an option as part of a house purchase, but they are also considered by developers who need to buy the land and building materials to build the property before they can generate income by selling it.
Specialist loans are available for developers, which may be better suited as they are based upon the gross value of the development. Developer loans are repaid in phases at key points during the development. A personal loan is another option if you only need to borrow a small amount, but often these are restricted and cannot be used to fund a house purchase.
Interest rates, and therefore repayments, are generally higher and can affect your credit rating and your eligibility for a mortgage if you need one. Re-mortgaging tends to be the most affordable option, but as it is spread over a longer repayment period the application process is longer, meaning it can take a while to receive the funds, which may not meet your objectives.