Property investors and developers are familiar with bridging loans. Although many homeowners have heard of them, they typically are not sure how a bridging loan works or how to go about getting one.
We will break down briefly how a bridging loan works and how to qualify for this type of finance for residential purposes rather than commercial.
To qualify for a bridging loan, one would need a property with equity, which is used as security against the loan. Bridging loan lenders will lend up to 80% LTV on a residential bridging loan. One would also need to have an exit strategy.
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Bridging loans are a fast straight forward option for equity-rich property owners, who require quick money in order to buy a new home. It could be the current home is not selling as quickly as you had hoped or you have found your desired home and need to buy it fast as not to lose it to another buyer.
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You can take out a bridging loan up to 80% LTV of the equity value of your current property to purchase the new one, once the existing property is then sold you pay back the bridging loan. This is known as “bridging the gap” hence the name of the loan. It is also why the loan is considered short term as they are typically borrowed from 3 – 9 months.
Residential bridging loans are regulated by the FCA (Financial Conduct Authority), and the consumer has rights and protection.
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A bridging loan is a short term facility and has a fast application process that assists land and homeowners in moving from their current residence to their next home, due to the short term nature of the loan and the regulations involved high street banks do not offer this facility to consumers. They are more commonly provided by hard money lenders or private lenders who are ready to provide short term solutions to consumers.
You can search the internet to find a broker or a lender.
It is advisable to find a broker who can package the application process and compare the whole market to find the best rates and ensure your application is successful and save you time and money.
Equity Requirements
Qualifying for a bridging loan is based on the prevailing equity within the owned property. Bridging loan lenders will typically lend up to 80% of the present equity value of the current property (LTV).
The scenario works well if you are looking to downsize and buy the new property in cash. But if the new property is more expensive, then the bridging loan can be used to put down as a down payment, requiring long term finance such as a standard mortgage.
The bridging loan can work well on either of those scenarios.
An exit strategy will be required before a lender approves the loan. The exit strategy, in this case, will be the sale of the existing home to pay back the loan.
Income is not required in all cases; if you have enough equity in the home, then income is not always required by the lender. This will also depend on what type of interest you are paying on the loan. If you are paying monthly interest, then you must have the income to pay that monthly debt. You can have the option by the lender to pay back all the interest at the end of the bridging loan term, this is known as rolled up or deferred interest.
From the lender’s point of view, they are mainly interested in the equity within your secured property and your exit strategy. This does not mean they will not check your credit history, they most certainly will, and if it is terrible, they may dig deeper and scrutinise the case. If you have a small problem like you missed a credit card payment, it should not be a problem.
If the credit history is really bad you may get offered a lower loan to value and or higher interest rates.
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Property Finance Partners has years of experience in helping people with bridging loans, you can book a free advice call. You can also contact Property Finance Partners on 020 3393 9277
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