If you are looking to borrow money for a short period of time, bridging finance could be the solution. In this article, we explain what you can expect when applying for a bridging loan.
What is a bridging loan?
Also known as bridge finance, this type of loan can provide you with short term funds to effectively bridge a gap in your finances or property transactions.
This can include buying a new property while you are still waiting to sell your existing one or if your business needs some short-term capital. You can also apply for bridging loans for land if you are looking to purchase development land that still requires planning permission before you can obtain a standard mortgage.
How do they work?
There are two main types of bridging loan – closed and open.
With a closed bridging loan, you agree the loan terms and final repayment date with your lender and then make your repayments accordingly. You are most likely to be offered a closed bridging loan if you have exchanged contracts on your property sale but are still waiting for it to be finalised and the sale funds released.
An open bridging loan has no set repayment date, but you will typically be expected to pay it off within 12 months. You will usually be offered an open bridge loan if you have not yet sold or exchanged on your existing property. However, your lender will want to see evidence of a repayment plan and what you are doing to sell your current home, as well as details on the property you are looking to buy.
The difference between first and second-charge loans
When taking out a bridging loan, your home will be assessed so that the lender can add what is called a charge to it. A charge is a legal agreement that decides which creditors will be repaid first should you not repay your debts. In this case, your property will be taken as collateral to settle your debtors in the agreed order.
If you own your property outright, or you have taken a bridging loan to clear off a mortgage in full, then you will be offered a first-charge bridging loan. This means that your bridging loan will be the first debt to be cleared by the sale of your property before any other debtors are repaid.
You will be offered a second-charge loan if you still have a mortgage on your property. In the case of defaulting on payments, your mortgage will be the first debt to be repaid before the bridging loan.
How much can you borrow with a bridging loan?
Working with a specialist bridging finance broker such as Finbri, you could be offered a loan from between £26,000 to £25 million. You are usually able to borrow more with a first-charge loan.
How bridging loans are costed
With the short-term repayment period associated with this type of finance, bridging loan interest is generally priced monthly rather than annually. These rates tend to be higher than a standard mortgage, with a comparable yearly rate (APR) coming in at anywhere between 6% and 19.6%. You also need to factor in the set-up fees for a bridging loan, usually around 2% of the actual loan amount.
Alternatives to a bridging loan
While there are benefits to applying for a bridging loan if you only require a short-term cash injection, for example to bridge the gap between selling and buying a home, they are not always the right choice. If you are looking to relocate, but do not want to sell your current home, then a ‘let-to-buy’ mortgage may be the better option.
Getting the right advice from experts will ensure you get the right form of financing for your individual circumstances.