A bridging loan is a short-term finance method used to help you quickly purchase a new property while you arrange the sale of your current property. It bridges the gap between the sale of your current house and the completion dates in a chain.
Borrowing bridging loans are typically for a short period, i.e. 1 to 12 months, and are payable in full (principal and interest) at the end of the term instead of monthly payments like those of standard loan finances. However, this does result in bridging loans being quite expensive due to high-interest rates.
In other words, a bridging loan is an additional loan you obtain to purchase a new house on top of your mortgage loan on the current house until it sells.
This means that you’re indebted to two lenders during the bridging period, and both charge interest respectively on the advancements made by them. Due to the higher risks involved in lending out bridging loans, lenders may charge higher interest rates than traditional loans.
So, before taking out any bridging loans, you should have a comprehensive understanding of how it works, and how expensive it can get.
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Bridging Loans Can Be Used In Either Of The Following Two Ways
1. Clear off the mortgage and a portion of the down payment:
For example, your current house has been valued at £500,000, and you owe your mortgage lenders a sum of £300,000. By acquiring a bridge loan of £400,000, you can pay off the mortgage on your previous house of £300,000 as well as loan closing costs and fees of around £10,000. This leaves you with a total sum of £90,000 as a down payment for your new house.
2. Apply for a second mortgage for the new home:
Similar to the example above, let’s say your current house has a fair value of £500,000 with £300,000 on a mortgage, leaving you with £200,000 as equity. You’ll be able to obtain a bridge loan of up to £160,000.
This way you can use your home equity in advance to apply for a second mortgage for your new house, which you will be getting in the future from the sale of your previous house.
In a perfect world, your previous house sells and you’re able to pay off your mortgage as well as the bridging loan, however, most of the time, in reality, things don’t work out as well as we would like.
In case, your previous house doesn’t sell in time for the payment or gets sold at a lower rate than what was expected, you might end up with the burden of a mortgage as well as a high charging bridging loan, resulting in extreme financial stress. Therefore, to get the best possible offers, you need to conduct plenty of research before deciding on a bridging loan.
Typical Costs Associated To A Bridging Loan
A bridging loan has high-interest rates as well as various other hidden fees attached to it, which can end up costing you a lot. You should ask your lender for a detailed break up of all the costs involved. Regardless of your lender’s help, you will typically be dealing with the following fees when acquiring a bridging loan:
● Interest Charges: In comparison to conventional loans, interest on bridging loans is charged monthly instead of annually. Depending on your Loan-to-Value (LTV) ratio, the interest rate may be anywhere between 0.4% and 1% per month. The lower the LTV ratio, the lower the rates, and vice versa. Depending on your loan structure, you can pay off your interest in any of the following three ways:
- Monthly: You pay your interest monthly while the total loan amount isn’t affected.
- Rolled-up or Deferred Interest: Instead of making monthly repayments like standard loans, your accrued interest gets ‘rolled up’ with the principal amount and further interest gets added onto the sum of them. The final balance is paid in full at the closing of the loan.
- Retained Interest: Your total interest payable is calculated at the beginning of the loan at a fixed rate, and is guaranteed to you by the lender along with the principal amount.
● Lenders Arrangement Fees: A lenders arrangement or facility fee is charged on the net or gross loan amount, at a rate varying between 1% and 2%. The higher the loan amount, the lower the lender’s arrangement fee and vice versa.
● Administration fee: This is charged only once the loan has been taken out, not during the application process.
● Valuation fees: Valuation fee is charged to verify the value of the property being used as security. This fee varies depending on the condition, location, and value of the collateral property.
● Redemption/Exit fees: An exit fee is also charged at around 1% of the loan amount at the time when the loan is closed. It is a legal cost incurred by the lender to remove the charge on the collateral property.
Get a No Obligation Bridging Loan Quote or Call 020 393 9277
How To Get The Best Possible Deal For A Bridging Loan?
You shouldn’t only be looking at a cheap option as the best deal for you, but also other factors involved too such as how quickly you can get the loan, the repayment structure, etc.
Your best chance at finding the most suitable deal for yourself is comparing as many lenders as you can. Of course, you can benefit off the ever-dynamic and highly competitive industry where lenders would offer you lower rates or better packages than their competitors to earn you as a customer. But, the following are the significant factors that are considered by lenders when assessing a bridging loan application:
The Exit Strategy:
The exit strategy is another name for your repayment method of the bridging loan you have acquired. Before approving your loan application, your loan provider will assess whether your exit strategy is viable enough for you to make timely payments. You can typically opt for any of the following exit strategies:
● Sale of property
● Sale of investments
● Sale of business or shares
● Refinancing the bridging loan to mortgage
The most popular of these strategies is selling the old house that you’ve provided as a security to your loan provider and refinancing your loan to a longer-term mortgage. If you plan to sell your house, the lender will need proof to ensure that the house will get sold within the loan term you have applied. You can provide a link of your house up for sale on your real estate agent’s website as evidence.
If you plan to refinance the loan to a mortgage, your lender will want to make sure that you’re eligible to get approved for a mortgage loan, as the terms for these are very different. You will have to obtain a decision from the mortgage lender in writing, to prove that you are able to quickly refinance the loan to long-term finance.
Experience in Property Development:
If you’re a property developer, the loan provider will want proof of your past records to check your credit history. It will be used as evidence as to whether you’ve completed loans on time previously. Depending on a good history of your past projects, you may be offered lower or higher interest rates.
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In case, you’re not a property developer and are applying for a bridging loan for the very first time, the lender may want proof of your monthly income to ensure you have enough funds to pay off the loan at the end of the term.
Loan to Value:
The loan to value ratio is another major determinant. A high LTV ratio leads to higher interest rates due to greater risks involved in case of default. On the other hand, lower LTV ratios have lower interest rates.
You’ll have access to the best deals in the bridging loan market if your security property is located in a sellable location, is in good condition, and the lenders are convinced that you’ll be able to sell it quickly and lucratively.
Good credit history isn’t a compulsory requirement to acquire a bridging loan, however, it is a significant determinant of the interest rate you will be offered. A good credit history will result in lower risk to the lender and hence lower interest rates for you, and vice versa.
Type of Bridging Loan:
The cost greatly depends on the type of bridging loan you’re applying for. For example, an open bridging loan requires you to pay back the loan within three years, but without you having to specify a repayment date. This involves a higher risk for the lender and will result in you paying higher interest on the loan.
Similarly, a close bridging loan requires you to provide a specific repayment date, which can only happen after you have finalized the sale of your house. A close bridging loan allows you to get credit on lower interest rates, which will ultimately benefit the customer more.
A first charge bridging loan leads to your loan provider having the right to your property in case you fail to sell the house. This provides your lender with a higher degree of certainty and results in lower interest charges for you the customer.
A second charge bridging loan means your mortgage lenders will have the first right to your house and not your bridging loan provider. This means lower certainty and security for your lender which may result in high-interest rates on loan.
As complicated as it may sound, a bridging loan can be an excellent option to profit from in the right circumstances. Given the expensive nature of bridging loans, it is suggested that you look for other finance options and speak with an expert before settling for a bridging loan.
Please view our bridging finance https://www.propertyfinancepartners.com/bridging-loans/
For more information on bridging finance and if you require the best rates contact property finance partners. Call 020 33939277 or email [email protected]