A bridging loan provides quick access to funds to those who need it temporarily like if they are buying a property at auction or are in a chain. However, pretty much all loans come with some element of risk and a bridging loan is no different, so if you’re considering a bridging loan it is essential that you know all the facts to make an informed decision on whether it is the right path for you. That’s where this article comes in. We will be exploring in detail what exactly a bridging loan is and the key things you need to know about it.
Defining a bridging loan
The term bridging loan is so named because it essentially works as a way to close the gap when those purchasing a residential property need part or all of the funds quicker than a conventional mortgage over a short period of time. As previously mentioned, the most common examples of this are property purchases at auction and those that are in a chain. It is
In the latter instance it can be difficult to get the timing exactly right when buying a new house and selling your existing one. So, if everything is set to go through on your new house before the current one as sold, you could lose out on buying your dream property without the money from the sale to use as a deposit for a mortgage or cover the cost of the purchase completely. That’s why bridging loans can be so useful.
Additionally, auctions often go through quickly and again if you are relying on the sale of another property or some other method raising the funds and just need the money temporarily in the interim in order to secure your auction purchase, a bridging loan can be a good way to achieve that.
What costs are involved with a bridging loan?
You can expect to pay a lot more for a bridging loan than you would for a normal mortgage for instance due to it only being for a short amount of time. These types of loans can cost you between 0.45% and 1.6% a month in fees not including the 2% of the loan that will go towards set-up fees. When it comes to interest on the loan it will be applied monthly to the amount you borrow but you will ultimately pay it at the end along with the total sum of the loan and the aforementioned fees.
With this in mind, it is advised that an individual apply for a bridging loan if they are certain that it will only be for the short term. It will start costing you a substantial amount of money if anything goes wrong and you aren’t able to pay back the loan within the time you initially thought, so a great deal of care needs to be taken.
What are the different types of bridging loan?
Open and closed are the two types of bridging loan that you need to be aware of.
Open bridging loan
There isn’t a set date that you need to pay back the amount you borrow with an open bridging loan. However, there is an expectation that you would pay it off completely within a year or two of taking it out.
Closed bridging loan
This type of bridging loan is most common when you are buying a new property and have reached the point of exchanging contracts, but the sale of your current house is yet to go through. A fixed date of repayment will be given with this type of bridging loan.
First and second charge bridging loans
You might hear these terms mentioned in relation to bridging loans, so it is important to know what they mean. The ‘charge’ refers to the priority of who will be repaid first in the event that you are unable to make your loan repayments and your property is taken as security and sold. If you have a mortgage out on the property, then your mortgage provider will be the first charge and will be the first to be paid and the bridging loan provider would be the second charge. However, if you didn’t have a mortgage on the property or the bridging loan was going to be used to pay off the mortgage then the bridging loan would be the first charge.
What are the advantages and disadvantages to taking out a bridging loan?
Advantages
- You can borrow the money you need quickly; the funds can be released within just a few days.
- Large amounts of money can be accessed, up to tens of millions if the borrower is wanting to cover the cost of several purchases. A good way not to miss out on a dream buy.
- There are flexible options for repayment that can suit your schedule, in many cases you could take up to 2 years to repay the loan but paying it back as quick as possible will save you the most money.
Disadvantages
- It can be very expensive due to the high interest rates attached and the short-term nature of the loan. You are essentially paying to have the convenience of instant money in a large amount.
- Bridging is a secured type of loan meaning you will be required to offer an asset like another property as collateral. This means there will be a risk of losing that asset if you can’t repay the loan in the agreed time.
- There are a lot of extra fees and charges involved that increase the cost even further.
What other options are there?
If you are in the situation where you need funds quickly to make a big purchase of a property, it might feel like a bridging loan is the only option and you rush into that decision without considering all the factors. However, this is not the case, there are other options out there that could be more suitable for your needs.
For example, if you want to buy a property but are struggling to sell your current one, you might want to consider a let-to-buy mortgage. The equity that you can release by remortgaging the house onto a buy-to-let mortgage can then be used to buy the property you’re interested in. This is only one example, there will be a solution that best suits your specific circumstances.
Conclusion
A bridging loan can be a benefit to some people who simply need to borrow an amount of money quickly in order to secure a property they want. It’s important to be aware of the risks though and consider all the factors to determine whether it is the best course of action for you.
If you’re buying a property and need help with professional and experienced residential conveyancing or commercial conveyancing the Toomey Legal team can help. Our property solicitors in Newcastle have the knowledge and skills required to ensure your conveyancing goes as quickly and smoothly as possible. Contact us today to discuss your needs.