JoshA bridging loan, or a bridge loan, is a loan that allows you to borrow money for a short period of time. It essentially works by bridging the gap between selling your old home and purchasing a brand-new property. Bridging loans are also common during property auctions. They allow house hunters to purchase a home immediately even if they do not have the funds from their house sale to do so. Read on to find out everything you need to know about bridging loans and how they could benefit you today.
Closed bridging loans
Bridging loans can be opened or closed. Closed bridging loans require a fixed repayment date. This is commonly known as an exit strategy. Most lenders offer this loan if you have already exchanged contracts but are waiting for your property sale to be finalised. Closed bridging loans are suitable for those who are confident they can repay the amount on the date their home sale is expected to close. They are also a great option if you need to make a large purchase but are waiting for a substantial cheque or payment to clear. In order to obtain a closed bridging loan, you will be required to prove how and when you can repay the amount back in full. They tend to benefit from lower interest rates compared to open bridging loans. This is due to the low risk associated with a defined exit strategy.
Open bridging loans
Open bridging loans, on the other hand, do not benefit from an exit strategy. They must, however, still be paid back in full and you must be able to provide proof that you are capable of this. They are suitable for homeowners that are selling a property but still waiting for a definitive buyer or fixed date. They generally carry a greater risk than closed bridging loans. As a result of this, interest rates are higher. Repayment timeframes can differ, but it is usually within 6 to 12 months. The terms and conditions of your loan will be laid out for you in full by the lender during the initial meeting. You may also have the option to pay the final amount back in full before the agreed deadline or pay interest first. To find out more about the different types of loans available to you, you must do your research. An industry-leading loan provider will be able to give you advice about bridging loans and mortgages to suit your lifestyle and budget.
Cost
The price of a bridging loan typically depends on a number of factors. They are priced monthly as opposed to annually as most borrowers tend to require the cash for less than 12 months. Bridging loans do, however, tend to be relatively expensive. They are pricier than standard residential mortgages with monthly fees costing between 0.5% and 1.5%. As well as monthly fees, bridging loans are subject to set-up fees. This is usually around 2% of the desired loan amount. Due to their high cost, bridging loans are only recommended for those confident in their ability to repay the amount in full within the shortest length of time. You must weigh up the pros and cons of bridging loans before signing on the dotted line. Costs can also vary dramatically depending on the lender you choose. Shop around for a provider that matches your criteria and offers you the best possible deal for your individual needs and requirements.
Borrowing limits
When it comes to bridging loans, the amount you can borrow depends on your circumstances. You can borrow as little as £25,000 or as much as £25m. Most lenders, however, only offer a maximum loan-to-value ratio, or LTV, of 75% of the value of your property. Borrowing limits also differ depending on whether or not you take out a first-charge loan or a second-charge loan. If the borrower fails to repay their loan on the agreed date, the lender can repossess and sell their assets. If the assets are owned by the homeowner, they are first-charge. Most lenders offer first-charge loans as they increase their chances of reclaiming the loan. Second-charge loans, on the other hand, are offered in addition to an existing loan or mortgage. If there is enough equity in the property, a second-charge loan can be taken out. They can be taken out on all property types and require permission from the first-charge lender first.
Bridging loans are a great option for a growing number of people. They allow homeowners to bridge the financial gap between buying and selling and are relatively quick and easy to arrange. If you are looking for a short term solution to your property troubles, a bridging loan may be able to offer you an additional layer of security without the long-term commitment.