Bridging Loan Uses
Sometimes you might need to access money quickly to buy a property and you cannot wait for the lengthy process of a mortgage application or a house sale, so you look for alternative finance options. One solution could be to borrow money from someone you know but if that is not an option, the next consideration is usually to apply for a Bridging Loan.
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What is a Bridging Loan?
A Bridging Loan is a short-term finance loan that can be used for a number of different reasons. It is commonly used to buy a property while an existing property is in the process of being sold but will not go through in time for the money to be available. It could also be used when someone buys a house at auction and they do not have the time to get a mortgage as they need to pay the seller quickly.
Another reason someone might choose to apply for a bridging loan is if they want to pay for urgent renovation work while they wait for a remortgage application to go through. Bridging Loans are frequently used by Property Investors but people who are not investors can also use it if they are in a situation that requires quick finance.
Types of Bridging Loans
There are two types of Bridging Loan:
Closed Bridging Loans have a fixed date for the loan to be repaid. Typically, this will be used if you have exchanged contracts and are waiting for your property sale to complete. It may be that there has been a delay that means your mortgage loan is not ready yet. With this type of bridging loan, the lender will want to know exactly how you are going to repay the loan, for example, through sale of your property.
With an Open Bridging Loan there is no set date for repayment but most lenders would require it to be paid within a year, as it is only ever intended to be a short term finance solution. When you take out a bridging loan, you do not have to have a specific exit plan, such as the sale of a property.
Bridging Loans will usually have higher interest rates that standard loans, due to the quick solution that they provide. They are often referred to as gap financing because they are filling the gap until another finance option is available.
Who can use Bridging Loans?
Bridging Loans can be used by individuals or by businesses, provided that they meet the required criteria. Some Bridging Loans will require the applicant to have some type of collateral as part of the loan agreement, such as property.
How Businesses use Bridging Loans
Businesses often use Bridging Loans for reasons other than buying commercial property via a Commercial Bridging Loan. They sometimes use it to cover costs such as paying tax bills while waiting for another finance solution. Some business owners use a bridging loan to purchase another business in a takeover, or they might cover the costs of a development project.
Bridge Loans for Property
In some situations, a homebuyer may need to take out a bridging loan to pay for their new property while they wait for their existing property sale to go through. If there is a delay in the sale, to avoid their purchase falling through, they can arrange bridging finance to ensure it goes through.
There are fairly strict lending criteria for this type of bridging loan use and the applicant would have to have excellent credit ratings as well as a low debt-to-income ratio. Another part of the criteria that lenders usually require is that the bridge loan is only up to 80% of the combined value of the two properties, which means that the applicant must have a large amount of equity in their property.
If the applicant does have a bridging loan approved in this type of scenario, the mortgages for the two houses are rolled together.
Property investors and Bridging Loans
Many property investors use Bridging Loans to enable them to build up their property portfolio. When they are buying property at an auction, a quick way to finance the purchase is through a bridging loan but they also use bridging finance to buy properties on the market too. Often, property investors will need property purchases to go through as quickly as possible so that they can get tenants into rented property.
Another way that property investors sometimes use Bridging Loans is if they want to buy a property and refurb it and then sell it on for a higher value than they bought it for. This process is called flipping and a short-term loan is ideal as once the property is purchased, they will spend a few months on the refurbishment and then quickly sell the property on.
Experienced property investors are usually quite likely to get approved for a bridging loan because they will have accumulated a lot of collateral in their property portfolio.
How does a Bridging Loan work?
The way that a bridging loan usually works is that a ‘charge’ is placed on your property. This ‘charge’ is a legal agreement that determines which lenders would get paid first if you were to miss payments on your loan and fall into arrears. If you own your property, then the bridging loan would be your first charge but if you still had a mortgage on your property, the loan would be a second charge.
If you are unable to make the payments on your bridging loan, your property could be sold to pay the loan back to the lender.
Is a Bridging Loan expensive?
Generally, a bridging loan will cost more than a standard mortgage because it is a short-term arrangement and the lenders will want to make enough money from the short period of interest to make it profitable for them.
The fees are usually charged on a monthly basis, rather than an annual basis due to the loans usually only running for a number of months. A monthly fee might be somewhere between 0.5% and 1.5% per month, costing considerably more over a year than an average mortgage interest rate.
When you take out a bridging loan, you will also need to consider that there will be a set-up fee for the product, which will be around 2% of the loan, which can obviously end up being a very high amount if you are taking out a large bridging loan.
How much could I borrow with a Bridging Loan?
This varies massively depending on the applicant’s financial circumstances and amount of collateral. The criteria will also differ depending on the lender but a large number of lenders will only lend up to 75% loan-to-value of the applicant’s property. In certain circumstances, if the client has sufficient equity in other properties, then a 100% bridging finance can be provided.
If you are able to take out a first charge loan, because you have no outstanding mortgage on your property, you will usually be able to borrow more than if you are taking out a second charge loan.
Is a Bridging Loan the right option for me?
A bridging loan can be the ideal solution for many people but there are disadvantages to consider too. These are the main pros and cons to be aware of:
Pros and Cons of Bridging Loans
The main Pros of taking out a Bridging Loan include:
- Fast access to money
- Able to borrow a large sum of money
- Protect property chains
- Enable projects to go-ahead which otherwise wouldn’t
The main Cons of Bridging Loans are:
- The interest rates are usually high
- You will usually pay a large fee for the set-up of the loan
- By securing the loan against your property, your property is at risk
When you are deciding whether a Bridging Loan is the right option for your circumstances, you should review all of the different options that are available. For example, if you are buying a new property before your existing property sells, you might be able to take out a Buy-to-Let mortgage instead.
However, if you are looking for an option that enables you to have access to money straight away, either to purchase a property, pay tax bills or pay for property renovations, then a bridging loan may be a better option.
Many property investors and property developers use Bridging Loans as a way to get started and then once they have made enough capital, they can stop using Bridging Loans to avoid paying the higher interest rates that typically come with this type of finance solution.
It is a good idea to get financial advice from an expert before you consider taking out any type of financial product. At Commercial Finance Network, as the UK’s leading Bridging Finance Broker, we can provide free expert guidance and advice on Bridging Loans and can help you to find the right type of finance to suit your needs. As a truly independent Bridging Finance Broker, we also have access to all of the UK’s Bridging Finance Lenders, so we can most certainly secure you the best deal and rates available in the market. If you are interested in any our Bridging Finance services or you want to know how our services could potentially assist in moving your project forward to the next step, speak with one of our Specialist Bridging Brokers today on 03303 112 646 or else request a callback via our Quick Enquiry form below.
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