For those who want to understand what short term bridging loans are, then this guide will help.
Essentially, a bridging loan will offer borrower access to finance over the short term (that’s up to two years) and are usually used for buying property until longer-term funding, such as a mortgage, comes through.
This means that the funding is being used to ‘bridge’ the gap between someone selling their home and buying their next one.
Bridging loans also help homeowners who may be struggling to find a buyer to move into their new home before they sell their current one.
This also means that for a short time, the borrower taking out a bridging loan will own two properties which could put their finances risk.
A bridging loan example
Here’s a bridging loan example that will help explain what bridging loans are used for.
Let’s say you own a home worth £300,000 and the outstanding mortgage is £150,000.
You are looking to buy another property for £400,000, but there’s a reason that you must move quickly, say within five or six weeks.
This timescale makes selling your current property a tad difficult but you have savings to cover the fees and expenses of £20,000, which means you need to borrow in order to buy your new property.
The downside is you won’t be able to get another mortgage until your current home has been sold so a bridging loan should be considered to cover the period of buying a property and selling your current one.
Salvage the home buying chain
It also needs to be appreciated that a bridging loan can also be used by those who are in a chain that may collapse at any point, so the finance will help salvage what is left of the home buying chain should a buyer drop-out.
Bridging finance is also a way to help someone buy and then quickly sell a property after renovating it, which makes them hugely attractive to those who buy property at auctions and need to pay for the property before the deadline.
This means they need to access a large amount of money quickly and it’s unlikely that they can arrange a traditional mortgage before the deadline.
Also, the property may not be in a fit state to attract a mortgage, so the buyer will be looking at bridging finance to fit the bill.
The other consideration is for those who may struggle to get a mortgage and are searching for ‘bridging loans for over 70s’, for example, as they may secure this type of finance more easily.
Bridging loan rates and fees
While that’s the purpose of bridging loans explained in a nutshell, you also need to appreciate the bridging loan rates and the fees they attract.
Firstly, bridging loans attract higher interest rates than a traditional mortgage will and you need to appreciate that the rates are expressed per month and not as APR (annual percentage rate) figures.
As an example, a bridging loan lender offering a rate of 1.5% per month means the loan has an 18% APR.
In addition, there will be administration fees involved with lenders and brokers charging around 1% for arranging the loan. Some lenders also charge an exit fee.
Types of bridging loan
However, there are different types of bridging loans, just like mortgages, so the rates can be fixed or variable.
For those bridging loans with a fixed rate, the borrower will be paying the same rate of interest across the loan’s term, so their monthly payments are the same.
With a variable rate bridging loan, then the interest rate may go up or down which will affect the payments.
Also, for those interested in a bridging loan, you need to understand whether it’s a ‘first charge’ or a ‘second charge’ loan, which means that should you default on the loan, it denotes who has priority of repayment.
It’s also worth explaining the difference between closed and open bridging loans.
For those who have a clear exit strategy, then their loan will be known as a ‘closed bridging loan’.
For example, should you be selling a property and waiting for completion then you will know when the money will arrive to repay your bridging loan.
The alternative to this is an open bridging loan because you have no set date for settling it.
These may be suitable for developers and for those who want to buy a home but haven’t sold their current property.
How do I get a bridging loan?
Finally, if you want to know ‘How do I get a bridging loan?’, then there are lots of advisers and brokers available, even though high street banks tend not to offer them.
You will also find it unlikely that a comparison website will offer a service for bridging loans because these need to be tailored to your own specific financial needs and situation.
They are also quicker to arrange than a mortgage – they aren’t quite ‘instant bridging loans’ but they can be arranged in a few days – and some lenders will carry out credit checks.
There’s no doubt that bridging loans have grown in popularity in recent years as banks and building societies have brought in stricter lending criteria.
For more help and information to understand short-term bridging loans and what they can be used for, you should contact the experts at The Bridge Crowd.