Bridging Loans
A Bridging Loan is a type of finance that is taken out to help you complete the purchase of a new property before you sell your existing one. These loans are effective, but the interest payable is typically more than a traditional buy to let mortgage. They are often used to bridge the gap between the sale of one property and the completion on another, particularly where the transaction is being completed as part of a chain. It can also help people who plan to sell a property quickly after undertaking refurbishment or acquiring a property through auction.
Bridging loans usually last just a few months, and interest can be paid in the following ways:
- Serviced – The Interest charged is paid every month
- Rolled up – The interest payable for the duration of the loan deducted from the Gross Loan amount, so no monthly payments are payable for the term of the loan.
A bridging loan is commonly taken out by homeowners, landlords and property developers for a variety of reasons including:
- To purchase a property which is deemed unmortgageable
- To buy property to redevelop or change its use by obtaining planning
- To purchase leasehold property with a low lease
- To pay a tax bill
Bridging loans present multiple benefits for transactions such as:
- Reduces the time, it takes to receive your funds
- Flexibility to repay the loan back in a matter days
On the other hand, bridging loans also present their disadvantages too, including:
- Loans are often secured against your property, so this is a huge risk if you cannot meet the repayments
- The bridging loan has a much higher rate of interest than traditional forms of lending
- These types of loans incur a number of fees so the costs can soon mount up
Bridging Loan Fees
When you take out a bridging loan, you will have to pay many different fees in addition to the high rate of interest. These fees will include:
- An arrangement fee for setting up the loan. This will be between 1% and 2% of the loan amount
- Some lenders will allow you to repay your loan early which will incur an exit fee of around 1% on the value of your loan
- You may have to pay a fee to cover the cost of administration
- Valuation and survey fees for the property
Once you have submitted your application for a bridging loan, decisions are usually provided very quickly, typically within 24 hours. If you are approved for the loan you will need to wait for a further 1 to 2 weeks for the relevant checks to be undertaken, the property valuation to be carried out and the money to be transferred.
Your home may be repossessed if you do not keep up repayments on your mortgage.
