Bridging loans are an excellent option for people looking to finance a residential or commercial property investment but need access to funds as soon as possible. Submitting a full mortgage application can take on average between 4 to 6 weeks therefore a bridging loan can help you access funds within a very short period.
Before you make any decision, it’s important to understand how bridging loans work with the property you want to buy.
What are bridging loans?
As short-term loans, bridging loans serve as a useful temporary option for investors until they find a suitable mortgage option. They are used to fund property purchases during auctions when a buyer needs to access funds within a short period of time and then utilise a conventional mortgage to repay the bridging loan.
Cost of bridging loans
In most cases, the cost of a bridging loan varies depending on the lender. Typically, the interest rates on bridging loans vary from 0.5% to 1.5%. However, there are considerable fees associated with bridigng loans including but not limited to arrangement fees, valuation fees and solicitors fees.
Why it’s called a bridging loan?
As the name suggests, a bridging loan is a short-term loan that you take out to bridge the gap between the amount of money you have and the amount required to purchase the property. The best part is that you can use this type of secure loan to purchase a residential property, make home improvements, move into another home, or buy a commercial property.
Duration of Bridging Loans
Bridging loans are usually short-term, with a maximum term of one year. However, they are not repaid monthly instead the borrower has to pay a lump sum payment of the original loan. Usually, the interest is deducted from the original loan as retained interest or rolled-up interest. The original amount borrowed inclusive of all the fees charged needs to be repaid in full and is usually paid as one lump payment at the end of the term.
How do bridging loans work?
These short-term loans can be used to cover the gap between selling your current home and buying a new one. Although borrowers can take them out for up to 12 months, they can also be extended as needed subject to the lender charges at the outset.
Cons of Bridging Loan
- ● Bridging loans typically cost more in the short-term than other types of loans. This is because the interest rate is usually higher than standard mortgage rates, and the loan is secured against your property.
- ● To get a bridging loan, you'll need to meet specific criteria such as income and property value to loan ratios.
- ● Bridging loans typically have a comparatively high-interest rate, and they're secured against the property you're utilising as security.
What are the alternatives to bridging loans?
If you have a good credit score and can afford to buy your first home, other options might be more suitable than bridging loans.
- ● Mortgage with a low deposit: You can get a mortgage with no deposit with the right lender. The lender will usually lend up to 80% of the home's value, so it's essential to check that they'll accept this before applying for your mortgage.
- ● Part exchange: If you're planning on moving to a new build house, part exchanges allow you to sell your current property to the developer in part-exchange for the new build house.
Conclusion
We hope you find this guide helpful and that it helps you understand the costs and processes involved with bridging loans.