Purchasing property isn’t always as straightforward as it sounds. Situations like using funds from the selling of one property to purchase another property can be quite uncertain, as the transactions would need to co-occur. Or you may find yourself at an auction and your funds arent quite in a transactive state. These are situations that bridging loans can certainly fix.
Continue reading to learn what bridging loans are, how to find the best bridging loans and the advantages of short term bridging loans.
What Are Short Term Bridging Loans?
A bridging loan is basically a short term loan. This type of loan is ideal for you if you are purchasing a property before selling another property. The processing time of a short term bridging loan is quite speedy, as the requirement of funds is usually urgent.
Bridging loans may help you in the following situations:
– You are in need of quick funds at an auction.
– Not wanting to lose your home after a property chain crash.
– In the purchase of an unmortgageable property. In order to arrange a traditional mortgage, you need to make the property habitable or rentable.
A bridging loan is a secured loan. This means an asset of yours such as a property must be secured against the loan. This is the risk factor involved in the outcome of default, and the reason bridging loans are often referred to as last resort loans.
How Do The Best Bridging Loans Work?
The borrowing limits for bridging loans normally range from £50,000 and £10 million. This range is usually influenced by the amount of equity one holds. The maximum loan to value is normally 75% of the value of the property as a loan. Your loan is secured against the property. Keep in mind that unlike mortgages bridging loans are not directly linked to your income. The repayment is usually completed using funds from the proceeds of your property sale or by the remortgage onto a standard mortgage product.
The Pros & Cons of Bridging Loans
Listing out its pros and cons is the easiest way to tell if a short term bridging loan is right for you.
Pros:
– You are able to borrow a large sum of money
– The process is speedy
– The repayment is flexible
– It is possible to secure lending on properties where high street lenders may not.
Cons:
– Your loan will be secured against the property.
– The convenient loan has a higher interest rate.
– Added fees and expenses may be applicable in certain cases.
Breaking Down Bridging Loans
Interest:
Interest on bridging loans can be charged in 3 ways:
– Monthly – this method is similar to an interest-only mortgage, where interest is paid monthly without being added to the loan
– Rolled-up – in this method the interest payment is added and cleared off directly when the loan is repaid.
– Retained – Your interest is borrowed upfront for an agreed period, and any unpaid interest is returned whenthe loan is repaid.
Cost:
Apart from interest here are some additional fees you may have to pay:
– The valuation fee this varies depending on the value of the property and at timesr
– Agreement fee of roughly1.5%- 2% to the lender.
– A fee of administration is a smaller upfront payment
– The legal fees
– Broker fees can be a percentage of the loan or payment once the loan is confirmed.
An Example of a Short Term Bridging Loan
Here is an example of how a bridging loan works. After you sell your existing property for £450,000 with a £50,000 mortgage, you want to purchase a new house for £500,000. You will need to borrow the full £500,000 and a 12-month bridging loan in order to sell the property. Additionally, you’ll need to arrange for a mortgage on your new property to cover the shortfall.
Where Can I Get The Best Bridging Loan?
When considering a bridging loan it is best to contact a broker although with sufficient information one can also approach a lender and discuss a loan. Lenders will need to assess several financial factors with a case before granting the loan, as each case is unique based on multiple requirements and conditions.
As security against the loan, the lender will require a mortgage over the property .
Another important thing a good lender would check would be your exit plan, so that both parties are on the same page when it comes to the payments. Usually, you must show the lender proof that the mortgage will be forthcoming if you are going to take out a typical residential or buy-to-let mortgage, such as on a property that has been renovated or a property that you are buying. Standard mortgage lending checks are conducted on affordability or the rental income generated by the property will be considered. The lender needs to be convinced that you can obtain a mortgage and that you can afford the new loan repayments.
Professionally, we advise using a specialised broker like PFN Finance. We can research the market for you and help you zero in on the best bridging loan options.
Contact us to learn more about how we can help you.
