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The Bridging finance

A bridging loan can be useful if you need to borrow money for a short period, most people look for a bridging loan to help to ‘bridge the gap’ lets say for instance, if you want to buy a new home before selling your old one. They are called bridging as they are not meant as a long term loan, they simply bridge your finances from one form to another.

Bridging loans can also be used if you buy a property at auction, where you’ll need the money immediately but may not have sold your current property yet.

 

How does a bridging loan work?


There are two types of bridging loan: ‘closed’ and ‘open’.


Open bridging loans


With an open loan, there is no fixed repayment date, but you will normally be expected to pay it off within one year from taking it out. The lender will want to see evidence of a clear repayment strategy, such as using equity from a property sale or taking out a mortgage. They will also want to see evidence of any property you are purchasing and the price you plan to pay for it. They will look for proof as to what you are doing to sell your current property, if that’s relevant.


Closed bridging loans


With a closed loan, there is a fixed repayment date – you will normally be given this kind of loan if you have exchanged contracts but are waiting for your property sale to complete.


What are first and second-charge bridging loans?


When you take out a bridging loan, a ‘charge’ will be placed on your property. This is a legal agreement that prioritises which lenders will be repaid first should you fail to repay your loans. Both a first and second charge bridging loan take your property as security in case you default on repayments. Generally, if you still have a mortgage on your property, the bridging loan will be a second charge loan, meaning that if you failed to meet repayments and your home was sold to pay off your debts, your mortgage would be paid off first. But if you owned your property outright, or you were taking out a bridging loan to repay your mortgage in full, you would take out a first charge bridging loan.


How much does a bridging loan cost?


As they are generally for only a short period of time the bridging loans are priced monthly, rather than annually. Of course one of the major downsides of a bridging loan is that they are expensive in comparison to other lending such as a mortgage. Often the fees are between 0.5% and 1.5% per month. The equivalent annual percentage rate (APR) on a bridging loan is between 6.1% and 19.6% which is more in line with hire purchase and credit card interest rates. Usually around 2% of the loan you want to take out is charged as an arrangement fee, so it is advisable to only take a bridging loan out if you are confident that you won’t need it for a long period of time.


How much can you borrow with a bridging loan?


Providers might lend anything between £25,000 and to over£25m. But you’ll usually only be able to borrow a maximum loan-to-value ratio (LTV) of 75% of the value of your property (that they have a charge over). If you are taking out a first-charge loan, you’ll typically be able to borrow more than if you were taking out a second charge loan.


What are the alternatives to a bridging loan?


If you want to move but can’t sell, you could also consider a let-to-buy mortgage arrangement. You can do this by re-mortgaging your current home onto a buy-to-let mortgage and using the equity released to buy a new property.


To find out the most appropriate lending solution for your needs, contact us: 01423 561060 or email info@sj-fs.co.uk