April 11, 2023
Matthew Fairy

What is a Bridging Loan?

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What is a Bridging Loan?

Simply put, a bridging loan is a short-term loan, which helps you to ‘bridge the gap’ between buying something and waiting for your finances to be accessible from selling an existing asset.

They are commonly used in the buying and selling of properties, especially when there is a high market demand and properties are selling quickly. Essentially, bridging loans (also known as bridging finance) can help to support the moving process, by helping you to buy a new property, whilst you’re waiting for your existing property to be sold.

They are a shorter term loan, which are typically secured against an existing property’s value.

What Can You Use a Bridging Loan for?

Bridging loans are commonly used to help you buy a property, before your old property has been sold. It can help you to ‘bridge’ the temporary gap in finances between the two sales. They are very often used by property developers and landlords, who may need the interim finance to finalise a purchase, before they have arranged their mortgage.  It can also be used for ‘unmortgageable’ properties, to make them habitable, and worthy of a mortgage.

However, bridging loans can be used for a range of other situations:

  • As finance to buy a property at auction
  • Business investments
  • Property renovations
  • Purchase of land and materials to build a property
  • Purchasing a retirement property
  • Buy-to-lets
  • Payment of tax bills
  • Downsizing

How Can You Use a Bridging Loan to Buy a Home Before You Sell Yours?

Often, having difficulty selling a property can cause issues in the property chain, and a bridging loan means you can work around these issues. Even a slightly slower sale, than purchase can hold up an entire chain. Not only that, but many buyers also want to start work on improving the property they’ve bought and that can be problematic when they haven’t received the funds from the property they are selling. Thankfully bridge loans can help to mitigate these issues.

The Key Points:

How Much Can you Borrow?

You can borrow up to £5 million pounds using a bridging loan. This will depend upon your own equity and will generally be capped at 75% of what you’re securing it on. It can be secured against multiple properties, to gain adequate financing and unlike a mortgage, it is not based on your income.

How Long Can You Borrow for?

Using bridging finance as short-term borrowing can be a quick and versatile way to access money to buy a house. Bridging loans are normally provided over a period of a year, or under, though sometimes longer loans may be available.

How Quickly Does it Take to Arrange a Bridging Loan?

Bridging loans can be organised rapidly, which is imperative when you have found your dream house and need to move quickly.

Do You Pay Interest?

Bridging Loan Interest rates will be charged monthly, though you may be able to choose to pay it in a single sum at the end of the loan.

What are the Bridging Loan Costs?

Interest Rate: You can expect to pay between 6%-20% APR, depending on your needs.
Arrangement Fees: These will be approximately 2% of the loan.
Exit Fees: Some lenders will charge an exit fee if you pay it back early – this will be about 1% of the loan.
Administration Fees: This covers the completion of your paperwork at the end of your loan.
Legal Fees: This is a fixed rate for the lender’s legal costs.
Broker Fees: This is the broker’s costs for locating the best bridging loan for your needs.
Valuation Fees: This pays for the surveyor who will value your property.

How Long Does it Take to Apply for a Bridging Loan?

Bridging loans can be actioned quite quickly. Once your bridging loan has been found, your application can be approved in less than a day and the funds can be with you in less than two weeks. Some bridging loan lenders may have a facility to expedite the process, for a higher fee.

How Do I Get a Bridging Loan?

Finding the most suitable bridging loan for your needs can be a complicated process. Once you know what you need to borrow and how long you want to borrow and how long you need to borrow it for, contact our team at Transparent Mortgage Services. Our brokers can compare the different types of bridging loans and find you the best deals, at the most competitive rates.

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