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One popular way of using a bridging loan is to buy a residential home before the sale of the existing house. This is a comprehensive guide on how it works.
The reason it works well in this situation is that bridging loans are short term, fast and flexible. It gives the potential buyer on getting the money in his bank account within a couple of weeks.
When you have found an ideal home or a bargain, it is crucial to move fast as not to lose it to another buyer. Sometimes waiting for the sale of your existing home may not be an option when speed is of the essence.
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Bridging loans are short term and secured against a property, they are typically used to buy a property and exited after a sale, or when long term finance is acquired.
RELATED: What are Bridging Loans
You may think that banks provide bridging loans; the truth is they don’t. High street banks offered bridging loans in the past, but after the economic crash in 2007 short term unregulated home loans had tight regulations, and high street lenders stopped providing them.
Bridging loans are provided by specialist hard money lenders and private funds. You can find the list of lenders here.
To get a bridging loan, you will have to package your application to one of these lenders and apply. Another option you have is to find an experienced broker, who can package the application on your behalf and because they work with the whole market, they can usually get you the best price.
Many brokers now days do not take a brokers fee, so it is worthwhile finding an experienced broker.
We at Property Finance Partners have vast experience in the bridging loan market. We can package your application and approach the whole market to find the best rates available.
Bridging loans are secured against a property, the amount you can borrow is up to 80% LTV Loan to Value of the equity in the property.
It should be worth noting many lenders will seldom go as high and will be comfortable at 75% LTV. The higher you borrower, the more interest you will likely pay.
The lender will have either first charge or second charge on the asset. If there is a mortgage already on the property, the lender will have the second charge. Second charge loans will also carry a higher interest rate.
Bridging loans can be secured against more than one property; this is a useful way to raise 100% LTC or more.
NOTE: It is essential to understand that if the loan is not repaid puts your home at risk.
When a bridging loan is borrowed against your live-in property, it is regulated by the FCA. The regulations offer further protection.
If it is obtained against commercial property, the bridging loan is unregulated.
Bridging loans come with several fees associated with the loan besides the monthly interest rate. These will include:
It is essential for anyone buying a home with a bridging loan to understand the interest rates. Unlike a standard mortgage which has an annual interest rate, a bridging loan interest rate is calculated monthly. Typically the interest rates start from 0.3% to 1.5% per month.
It sounds expensive, but consider they are short term loans and are not meant to be obtained long term like a home mortgage. Also, bridging loans are considered riskier.
How much interest you pay will depend on your application, lenders will look at how much equity you have, how much LTV you want to borrow, is it first charge or second charge, how long is the loan for, what will the loan be used for and what is your exit strategy. All these are determining factors for a lender ion offering you a rate.
It is prudent to search around with different lenders to get the best rate. A bridging loan broker will have access to the whole market and find the best rate available.
The lender will apply an arrangement fee, which is typically 2% of the loan amount. So if you borrow £100,000, the arrangement fee will be £2000. This is paid at the start of the loan; it can be acquired as part of the total amount.
You must pay a valuation fee, the lender will have a panel of evaluators approved by them. The valuation will be on the security property so as the lender can establish the value of the property. The cost will be levied on you as the borrower. The cost of this can be varied depending on the valuation company they offer. Typically you will be provided several valuing companies, and you can choose which to use.
An example would be £600 on a property of £500,000.
You must pay the legal fees on both sides. How much you pay will depend on the solicitor firms used.
Some lenders will also add an admin fee. It is not uncommon to pay a few hundred pounds for this. It will not always be the case with the lenders and depends on the lender you choose.
If you use a broker to package the application, you may have to pay an additional broker fee, which is usually 1% of the loan amount. Here at Property Finance Partners, we don’t charge any broker fees.
Again this depends on the lender, for example, early repayment fee and exit fee. Again it depends on who you go with. It is advisable to use a bridging loan calculator to understand all the fees and costs.
If you use a broker, you may have to pay the broker fees. Property Finance partners charge no broker fees. To find out more contact us today on 020 3393 9277 or email: [email protected]
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Let us say your home is worth £500,000 without a mortgage and you want a loan for three months.
The borrower offers you 75% LTV that is a gross borrowing of £375,000.
Now that may not be the money you receive. You have the interest and other costs taken away, so your net borrowing maybe £340,000.
When you take out a bridging loan, the lender will expect you have a plan to repay the loan. The terminology used in the industry is an “exit plan”, so once the existing home has sold on the market, you simply pay back the loan and the associated costs. We will look at the costs that are typically associated with bridging loans below.
Bridging loans are perfect to buy the house outright and have no mortgage. You can borrow 80% on the equity available within your existing home. It ultimately makes a move smoother without rushing and trying to sell your current property at a lower price.
Buying a retirement home is related to downsizing and bridging loans are perfect for this. You can also borrow extra to make any refurbishments to the new house.
When purchasing a property at an auction, you will need to pay an immediate deposit of 10% and then complete the deal within 28 days. If you have the cash that’s all well and good but if you don’t, then a bridging loan is the ideal solution, due to the speed. Bridging loans for auction properties are quite popular. A mortgage is out of the question because a standard mortgage can take months in some instances.
Bridging loans are useful for renovating a property as you will not get a mortgage for this, especially if there is no functioning bathroom or kitchen.
You can get a bridging loan to refurbish a property, it is useful to increase the value before the sale. Once you make the sale, the bridging loan can be paid off.
One of the best advantages of bridging loans is purchasing your new home right away, the application is fast.
With bridging loans, you will have enough time to look and get a better price for the property you want to sell.
The loans are flexible and can be extended if required.
Interest rates can be rolled up so you don’t pay any interest until the end of the loan term when you pay the loan.