Bridging loans can be advantageous for various reasons, such as assisting in purchasing a property if your property chain breaks down, facilitating downsizing while intending to buy before selling, or aiding in acquiring auctioned properties when funds are not readily available. We elucidate the concept of bridging loans, their usage, advantages and disadvantages, associated costs, and the application process.
What Is a Bridging Loan?
Bridging loans serve as a short-term borrowing method. They serve to "bridge the gap" when there's a need to acquire one property before the sale of another. Unlike mortgages, bridging loans can be swiftly arranged, particularly when speed is crucial. However, bridging loans are secured loans, necessitating the provision of collateral, typically in the form of property or properties. Due to the risk of forfeiting the asset, bridging loans are sometimes dubbed as the last resort in lending.
How Can I Use a Bridging Loan?
Here are scenarios wherein a bridging loan might be considered:
In the event of a collapsed property chain, preventing the loss of an opportunity to purchase a desired property.
When purchasing an auctioned property and requiring prompt fund allocation.
Facilitating downsizing by using a bridging loan for the new purchase, providing more time to sell the current property and potentially achieving a higher selling price. It also alleviates the pressure of simultaneous buying and selling.
Acquiring unmortgageable properties with the intention to make them habitable or rentable, eventually arranging a traditional mortgage.
When purchasing land, covering land and construction expenses while awaiting mortgage approval.
How Do Bridging Loans Work?
So, how do bridging loans function?
Typically, bridging loans range between £50,000 and £10 million. The amount depends on the available equity. The maximum loan, including interest, usually caps at 75% loan-to-value. The loan is then secured against the property or properties, enabling the raising of necessary funds. Unlike mortgages, bridging loans are not directly linked to income.
Consider this example of bridging loan utilisation:
You aim to purchase a £300,000 house, requiring a £100,000 deposit and the remainder through a mortgage.
However, your current property hasn't sold, and you possess only £25,000 in savings.
You bridge the gap by securing a £75,000 bridging loan for the deposit.
Upon the sale of your current property, proceeds are used to repay the £75,000 bridging loan.
Pros and Cons of Bridging Loans
Prior to applying for a bridging loan, it's essential to weigh the pros and cons:
Pros:
Speed: Quick access to funds, crucial for keeping property transactions on track.
Larger Loans: Potential to borrow significant sums.
Flexibility: Repayment terms adaptable to suit plans.
Expanded Options: Possibility of securing loans on properties where mainstream lenders might hesitate.
Cons:
Property Secured: Bridging loans require collateral, risking asset loss if repayment falters.
Higher Rates: Convenience of swift, flexible finance is offset by elevated interest rates.
Fees: Bridging loans may incur various fees, adding to expenses.
Types of Bridging Loans
There are distinct types of bridging loans:
First and Second Charge Bridging Loans:
Secured loans entail a charge against the property. With no existing loans, it's a first charge loan, prioritising repayment upon property sale. In the presence of an existing mortgage, the bridging loan becomes a second charge loan, often more costly.
Fixed or Variable Interest:
Similar to mortgages, borrowers may opt for fixed or variable interest rates. Fixed rates remain constant throughout the term, while variable rates fluctuate with Bank of England interest rate adjustments.
Open vs Closed Bridging Loans:
Open bridging loans lack a fixed repayment date, allowing repayment upon fund availability, albeit typically expected within a year. Conversely, closed bridging loans have set repayment deadlines, usually cheaper than open ones.
Bridging Loan Interest Rates:
Interest rates are typically higher due to rapid fund access. With short terms, interest is daily, not annually. Interest can be:
Monthly: Interest payments made separately.
Rolled Up: Interest added to the loan, paid upon loan clearance.
Retained: Borrowing interest upfront, with unused portions refunded upon loan repayment.
Bridging Loan Costs:
In addition to interest rates, various fees may apply:
Lender Arrangement Fee: Typically 2% of the loan, added to the principal.
Administration Fee: Payable upfront.
Legal Fees: Split between upfront and completion payments.
Valuation Fees: Ranging from £900 to £2000, depending on urgency.
How to Obtain a Bridging Loan
While direct lender engagement is possible, consulting a specialist broker is advisable. They navigate the market and may negotiate favourable rates. Lenders typically require property collateral and an exit plan, detailing loan repayment methods and timelines.
For traditional residential or Buy to Let mortgages, proof of mortgage feasibility is essential. Lenders assess affordability and rental income for assurance of loan repayment capability.
Bridging Loan Example:
Consider this scenario: You own a £600,000 property and seek a 12-month bridging loan to downsize to a £400,000 property before selling your current home.
Here's a breakdown:
Net Loan Amount: £400,000 Monthly Interest Rate: 0.7% Interest Amount: £35,623 (Based on a 12-month term, calculated daily) Arrangement Fee: £8,000 (Added to loan) Gross Loan Amount: £443,623
Additional Costs: Valuation Fee (Inc. VAT): £522 Telegraphic Transfer Fee: £35 (Added to loan) Administration Fee: £145 (Added to loan) Estimated Legal Costs: £900 Redemption Administration Fee: £40
Bridging Loan Approval Timeline:
Typically, bridging loans are swiftly approved, with processing times ranging from 5 to 21 days, though expedited approvals are feasible in certain cases.
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