Bridging finance, everything you need to know

 
A bridging loan is a short-term finance option for buying property. It ‘bridges’ the financial gap between the sale of your old house and the purchase of a new one. If you’re struggling to find a buyer for your old house, a bridging loan could help you move into your next home before you’ve sold your current one.
 

What else can you use a bridging loan for?

 

  • Buying a property
  • Property development
  • Buy-to-let investment
  • Business ventures
  • Paying a tax bill
  • Divorce settlements

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    Many individuals and businesses including professional landlords, property investors and developers can use bridging finance as part of their overall property funding strategy and can be arranged on a second charge basis.
     
    In the current market conditions bridging finance continues to grow amidst low interest rates. With delays and challenges sometimes with high street lenders for a normal mortgage a bridging loan may be the ideal solution short term.
     

    Advantages of a bridging loan

     

  • Speed – bridging loans are paid out faster than a standard mortgage and you will receive the funds quickly.

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  • Deferred Payment – It is usually not necessary to repay a single penny of the loan until the agreed repayment date at the end of the term.

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  • Flexibility – bridging loans are more flexible than your standard mortgage. Bridging lenders generally are not concerned about income and affordability as their main concern is the exit route for the bridging loan.

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  • Borrowing – up to 70% loan to value based on product which is subject to underwriting.

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  • Rates – starting from generally 0.49% a month as a bridging loan is a short-term loan. The rates are based on the loan to value and product which can change at any time. The Interest is charged at higher rates than normal mortgages for the speed and efficiency of obtaining and getting a bridging loan in place.

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  • Exit – As a bridging loan is a short-term loan it will always require an exit strategy before a lender will consider an application. for example, an exit can be sale of a property or a remortgage.

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    Disadvantages of a bridging loan?

     

  • Compound Interest -For every month, a loan isn’t repaid, it gathers compound interest. This means that you’ll end up paying more interest in total than you would if you rolled it up, as your loan amount is increasing month-on-month.

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  • Short Term Finance – Bridging finance is strictly short-term and must be repaid within a matter of months however longer repayment periods are typically unavailable.

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  • Fees – Fees for bridging loans can be a good deal more expensive than their traditional counterparts. Borrowers will typically have to pay an arrangement fee of around 1.5% which will be added to the loan amount. Broker fees, valuation fees and sometimes legal fees must also be paid and can differ greatly between vendors.

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    A recent client Scenario:

     
    Mr & Mrs Green had a residential home with a value of £400,000 with no mortgage outstanding.
     
    They wanted to purchase a new residential property for £300,000 as soon as possible as the sellers wanted to move fast and needed to complete within in a certain timescale.
     
    Mr & Mrs Greens’ current property would not have been sold in time as they needed the equity from the property to purchase the new property.
     
    Solution – A normal standard mortgage would have taken a longer time to complete due to completion timescales. The clients applied for a short-term bridging loan to secure the new purchase.
     
    Product – Regulated bridging loan for a maximum period of 12 months.
    Rate from 0.49%
    Rolled up interest.
    Fees added to the loan.
     
    Exit – Once the current property was sold the bridging loan was repaid with the proceeds of their sale.
    The clients were happy as they purchased their ideal home within the completion timescales.
     
    The bridging market has grown in recent years, with more and more people looking to use it for short term financial solutions. It is always best to speak to an independent mortgage adviser as sometimes you may not think about other solutions yourself and may need independent advice. If you would like to discuss bridging loans, please get in touch.
     
    This article was written by our mortgage adviser Mandip Rudki.