The clue is in the name, i.e. it helps them get from one side of a financial transaction to another. People typically take out a bridging loan when buying and selling property. They may, for instance, buy a new property without the sale of their existing property having gone through. They get a bridging loan to pay for the new property and pay the loan off when they sell their existing house or apartment. Some developers take out a bridging loan to pay for a refurbishment project then pay it off when the property is sold.
Bridging loans are secured against an asset
A bridging loan is one which is referred to as a secured loan. In other words, it has to be secured against an asset you own, usually a property. It can be a first or second charge loan. A first charge loan means it’s paid back first. If there’s a mortgage on the property then that will be the first charge loan; the bridging loan will then become second charge. A second charge bridging loan costs more than a first charge version. You’ll also need the first charge lender to agree to the second charge bridging loan.
Where can you find a bridging loan
It’s best to get a bridging loan through a specialist lender, since very few high street lenders now provide them, only a few regional building societies or alternative lenders. A mortgage broker should be able to point you in the right direction.
How much can you borrow?
It’s possible to borrow a sum of money between £50,000 and £10 million when you take out a bridging loan (some can lend less than this). It comes down to how much equity you currently have in your property. The most you can borrow, including interest, is around 75 per cent loan to value. It doesn’t have to be secured against one property, but can be spread across a number of houses or apartments.
The condition of the property itself (if you’re planning a refurbishment) will affect the amount a lender will allow you to borrow. So too will your credit history.
Paying back a bridging loan
You can pay back the interest for your bridging loan in several ways. One is monthly where you only pay the interest so that it doesn’t become part of the loan. Or, conversely you could add the interest to the loan and pay it altogether. Thirdly you could take out a retained bridging loan. This means borrowing the interest upfront for a certain length of time. Once the loan is paid off, you get back any unpaid interest.
Pros of a bridging loan
It’s possible to borrow a lot of money in a short space of time
You can secure the loan on property you own
You can arrange payment terms to fit in with how long you’ll need it for
Cons of a bridging loan
If you don’t repay the loan you could end up losing your property (or whatever asset you’ve secured against it)
Interest rates on a bridging loan are higher than those on a normal loan or mortgage (anything from six per cent APR to 20 per cent APR)
Bridging loan interest rates are charged daily rather than annually
Cost of a bridging loan
In addition to the interest for taking out the loan, you will have to pay arrangement costs for the loan (around two per cent of the loan’s amount). There will also be an admin fee, legal fees and valuation fees for the property. There may also be broker fees (either a flat fee or a percentage of the loan).
Get in touch for advice
If you are considering the possibility of taking out a bridging loan, but aren’t quite sure where to turn, then do get in touch with one of our advisers at Teal Finance today. You can call us on: 01603 574404 or write via email@example.com.