What are bridging loans?
They are designed to complete an onward purchase before the client has sold their existing property. They can be used to: buy property; initiate property development and invest in buy to let property. They offer short term access to funds at a high interest rate – rates can be around 1.5% per month, so 18% annually. These loans can be used by someone buying at an auction, as there is a need to complete within 28 days.
There are a number of considerations loan providers take into account when considering eligibility for bridging finance:
- Some providers may only offer bridging finance if you are borrowing the new mortgage through them.
- Providers usually require property as security.
- You may have to show proof of income, particularly if you are paying interest on a monthly basis.
- You may need a business plan if the bridging loan is for commercial purposes
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Your home/property may be repossessed if you do not keep up repayments on your mortgage.
Some buy to let mortgages and bridging finances are not regulated by the Financial Conduct Authority.
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There are 2 types of bridging loan
This type of loan is normally settled within a few months, and requires you to have an ‘exit plan’, where you know exactly how you will be paying off the loan. Also they often carry lower interest rates.
Open requires a detailed exit plan, and therefore is considered more time-effective. They normally allow up to a year to be settled. Because it’s higher-risk, interest rates are normally higher.
How is interest paid?
- You can choose to pay interest separately on a monthly basis, and therefore is not added to the loan amount.
- Alternatively, you could roll up the interest, where you’ll pay compound interest in full along with the loan when repayment is due.
Advantages of bridging finance
- You’ll receive the funds quickly.
- You can borrow large amounts – from £5,000 up to £250mil, providing you have the security to back it up.
- Flexible borrowing may apply.
Drawbacks of bridging finance
- The loan is secured against property, therefore ownership is at risk if you are unable to make repayments.
- The interest rates tend to be high.
- There are numerous fees involved – an arrangement fee for the loan set-up circa 1-2% of loan value, an exit fee if the loan is repaid early circa 1% of loan value, a repayment fee for the cost of administration, and a valuation fee for the costs of the surveyor.
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