28th March 2020
Is a bridging loan right for me?
Are you worried you’re going to miss out on buying your dream home because you can’t find a buyer for your current house? Or do you want to snap up a property at auction but you’re worried about getting a mortgage in place in time to complete the purchase? Then a bridging loan could be the answer. Here’s what you need to know.
What is a bridging loan?
Bridging loans are short-term loans, used mainly for buying houses. They’re a useful option if you need to access cash quickly for a short period of time.
They’re often used by home buyers to ‘bridge’ the gap if they want to buy a new house before they can sell their old one.
They can also be used for:
- Buying a property at auction
- Buying a house under market value where a quick completion is required
- Buying a property that is deemed unsuitable for mortgage purposes with mainstream lenders (e.g it has no kitchen or bathroom) in order to renovate it
- Releasing equity from a property, for example to pay a tax bill or divorce settlement
What do I need to know?
It’s important to know there are two different types of bridging loans:
Closed bridging loans: With these, you’ll have a fixed repayment date. These will typically be used if you have exchanged contracts with a buyer but you’re waiting for the sale to complete.
Open bridging loans: These are different because there isn’t a fixed date when you’ll need to repay it. These could be used if you want to buy a house but you haven’t found a buyer for your existing home yet. Or it might be useful if you’re an investor and you plan to renovate a property, then sell it on to pay off the loan. However, while you won’t have a fixed repayment date, you’ll usually need to pay it off within one year.
Fixed and variable rates
Just like traditional mortgages, you can get fixed and variable rate bridging loans. As you would expect, with fixed-rate bridging loans, the interest rate remains the same over the term. Whereas if you choose a variable-rate deal, the interest could increase or decrease, which would result in you paying back higher or lower amounts.
What is the difference between a first and second charge bridging loan?
When you take out a bridging loan, a ‘charge’ will be placed on your property. And if you default on the loan, this legal agreement dictates which lender will be repaid first.
Usually, if you have a mortgage on your house, the bridging loan will be a ‘second charge’ loan. So if you’re unable to make your repayments and the property is sold to pay your debts, your mortgage would be repaid first.
However, if you own your home outright, you would take out a ‘first charge’ bridging loan. This means that if you default on the loan, the bridging loan would be repaid first.
If you take out a first-charge bridging loan you can usually borrow more than if you take out a second-charge one.
How much can I borrow?
This can vary hugely as lenders could lend anything from £30,000 to £50 million. However, the amount you can borrow will depend on the value of your property. Lenders may offer a maximum LTV of 65-80%, although you may be offered less depending on your circumstances. However you may be able to borrow 100% LTV, subject to additional security.
How can I get one?
We work with excellent advisers to make sure you get the right advice when it comes to taking out a bridging loan, so that you know this is definitely the right option for you.
How quickly can I get the money?
You’ll usually get a decision on whether your application has been successful between one and two days after submitting it. And the funds will typically arrive around two to four weeks later.
What do I need to consider?
While bridging loans can be an excellent short term option, you should be aware they’re usually much more expensive than a traditional mortgage. Plus you’ll often need to pay fees such as administrative fees too. So, it’s always better to get advice before taking one out and consider if there are any alternatives that might suit you better. For example, could you remortgage your home on a buy-to-let property and use the equity released as a deposit to get a mortgage on your new property?
To find out more about bridging loans, please contact our team of advisers and they can talk through your options.
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