Bridging loan is a popular type of short-term loan UK that offers several benefits to the borrowers compared to traditional property loans. It is designed to fill the financial gap between selling a property and purchasing a new one. In this guide, we are providing all the necessary information about bridging finance.
How Does Bridging Finance Work?
Bridging loans work almost in the same way as the other types of loans, but its process is a bit different:
- You apply for an amount you need to purchase a new property through this loan.
- The loan provider asks for some information about the property, such as its sale value.
- You have to provide proof that you are able to repay the loan. It is usually known as an exit strategy and usually consists of refinancing or property sale.
- The loan is secured against property, so if you are not able to repay the loan, the lender will repossess your property to get the loan amount.
Usually, there are two kinds of bridging loans UK – open and closed. An open bridging debt does not have any specific repayment date, while the closed one has a particular time frame.
When Do You Need A Bridging Loan?
Bridging loans can be useful in the following scenarios:
- When you are buying a new home but waiting for funds to become available by the sale of the old house.
- When there is a limited time opportunity like an auction, and you need quick funds.
- You have won a bid at auction and require funds to complete the payment.
Difference Between First And Second Charge Bridging Loan?
The charge on loan explains which lender or debt is paid first when a property is sold.
If you already have a mortgage loans UK, it will take priority, and the bridging loan will become the second charge loan because it will be paid off after the mortgage.
A bridging loan is the first charge loan when you do not have any larger debt, and the money from the selling of old property goes straight to pay off the bridging finance.
How Much Can You Borrow?
The amount you can borrow through this type of debt varies from lender to lender. Typically, the smallest amount that you can take out is £25,000, and there is no upper limit. However, you can not take an amount more than the value of your property. It depends on your equity in the property you are using as security against the loan.
Due to the short-term nature of bridging finance, the interest rates are higher than the traditional mortgages and personal loans. In addition, lenders charge interest rates monthly, which bumps it up even more.
What Are The Risks?
Although bridging finance offers several benefits to the borrowers, it also has some risks that you should keep in mind before taking out a loan. The most significant risk is the risk of repossession. If you are not able to repay the loan amount, your lender has a right to sell your property to get the loan amount back. Another thing that you should remember is that you have to pay a higher interest rate than the mortgage and other property loans. Other than the interest rate, there are several additional fees that add up to your borrowing cost and make it an expensive way of borrowing. Bridging Loan Providers help you to understand the requirements.
Alternatives to Bridging Loan
Bridging finance may not suit everyone’s situation. However, there are many other options to borrow which are less risky.
You can get a mortgage on your second property. It may have a longer term, but it might be less expensive than bridging debt.
If you need a small amount of money, you can consider an unsecured personal loan since personal loans have annual interest rates so that you might have less expensive repayments.
Now that you know most about bridging finance, it can be easier for you to decide if it is a suitable choice for you or not.