How to find the best bridging loan – Forbes Advisor UK

Finding the best bridge loan for your situation can ease the burden at a time when many financial and practical plates are spinning at the same time.

But, as always, the first step is to fully understand what this type of loan is, how it works and what the risks are.

What is a bridging loan?

A bridge loan is a type of short-term financing typically used when you want to buy a new home before selling your old one.

The loan “bridges” the purchase and the sale.

Bridge loans are usually taken out for a maximum of 12 months and can normally be closed fairly quickly.

What else can a bridging loan be used for?

Although bridging loans are typically used when there is a gap in a residential real estate transaction, they are also often used by real estate investors and developers.

For example, if you buy a property at auction, you should normally complete the transaction within 28 days. This will not be enough time to arrange a standard mortgage, so bridge financing is used instead. The buyer can then remortgage with a traditional lender later.

Bridge loans can also have other uses for property. For example:

  • Real estate renovation
  • Buy a non-mortgage property
  • Buying a property with a short lease
  • Urgent real estate transactions

Bridge loans can also be used for non-property related reasons such as:

  • Repay debts or tax bills
  • Solve short-term business cash flow problems
  • Divorce settlements

Is a bridging loan a secured loan?

Yes, bridge loans are a type of secured loan, so you will need to set up an asset as collateral for the loan.

Having a ‘charge’ on your property means that there is a legal agreement for the lender to proceed with the sale of your property if you do not repay the loan as agreed.

If there are no other mortgages or loans on your property, the bridge loan will be a “first charge” loan. If you have a mortgage on your property, the bridge loan will be a “second charge” loan. Charges refer to the order debts that will be paid when the property is sold.

Because bridge loans are secured loans, you can usually be accepted even if you have bad credit. The downside is that your property may be repossessed if you don’t repay the loan as agreed.

You can usually borrow between £5,000 and £25m (sometimes more) on a bridge loan. The exact amount you can borrow will depend on the value of the property you are posting as collateral.

Where can I get a bridging loan?

  • Banks
  • construction companies
  • Specialized bridging lenders
  • Relay brokers
  • Mortgage brokers

What is a bridging loan exit strategy?

Bridge loans are designed as a short-term financing solution. When you take out one, you’ll usually need to have a plan for how you’ll pay it back: this is called the ‘exit strategy’.

Typical exit strategies include:

  • Sell ​​the property you bought with the bridging loan
  • Selling another property you own
  • Repayment to a standard mortgage
  • Selling a business or other property
  • Money from a business transaction, divorce or inheritance

What are open and closed bridging loans?

Bridge loans can be “open” or “closed”.

Open bridging loans are generally more expensive. They do not have a fixed repayment date and are therefore more flexible than closed bridge loans.

Closed bridge loans require you to have an exit plan and set a payment date when you take out the loan. Closed bridging loans are usually contracted for a few weeks or a few months.

How much does a bridging loan cost?

Bridge loans are expensive compared to other types of mortgages or loans.

Since bridging loans tend to be short-term, interest is charged daily rather than annually. Annual Percentage Rates (APRs) can range from 6% to 20%. By comparison, standard mortgages can be as cheap as 1% or 2%.

Like other types of home financing, lenders offer bridging loans with fixed or variable interest rates.

In addition to interest, you will likely have to pay arrangement fees to the lender, administration fees, appraisal fees and legal fees for the transfer of ownership.

If a broker arranged the loan, there will likely be a fee for that as well.

Do I have to make monthly payments on a bridging loan?

Bridging lenders do not always require monthly repayment. Instead, interest payments are “accumulated”. This means that they are added to the loan and paid at the end of the term. However, this means that interest charges are compounded monthly and can add up quickly.

With some bridge loans, you can pay interest monthly, like an interest-only mortgage. Then you repay the principal of the loan at the end of the term.

Another option is “retained interest”. For example, a loan of £100,000 with an interest rate of 1% would represent £12,000 in interest over a period of 12 months. The lender keeps the £12,000 and the loan amount paid to you is £88,000.

Are bridging loans regulated?

Bridge loans can be regulated by the Financial Conduct Authority (FCA) or unregulated, depending on the nature of the loan.

If a borrower’s home (or a home occupied by close family members of the borrower) is used as collateral for the loan, the bridge loan must be sold as a regulated loan.

The regulations mean that consumers are protected against incorrect advice or mis-selling from lenders or brokers.

However, bridge loans taken out in the name of a business (not an individual) will not be regulated, as they are treated as a business transaction. This means the borrower has less protection.

Advantages and disadvantages of the bridging loan

Bridging loans mean quick access to cash that can help with real estate purchases and time-sensitive business transactions. They often prevent real estate chains from collapsing when a buyer pulls out.

Bridge loans can also provide funds for the purchase of property where the property is not mortgageable for any reason – such as being uninhabitable or having a short term lease.

With the right security, you can borrow a lot of money on a bridging loan and have different repayment options.

On the other hand, bridging loans can be very expensive. If you get the bridge loan on your house and you can’t repay the loan, your house could be repossessed.

For many borrowers, alternative financing options might work better.

How to find the best bridging loan?

Especially when it comes to high-risk financing options like bridge loans, it’s important to compare your options and understand the product before signing up.

A global bridging loan broker will be able to find the best option for your personal situation and guide you through the process. Some brokers do not charge a fee to the client.

You can also compare online bridging loan providers for rates and terms online, and reference any advice or recommendations in relation to this.

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