Bridging loans offer a versatile financial solution for various scenarios, including stepping in when the property chain encounters a breakdown, facilitating the purchase of a new home before selling the current one, or swiftly acquiring a property won at auction when time constraints hinder conventional financing. In this article, we delve into the essence of bridging loans, exploring their applications, advantages, disadvantages, associated costs, and the steps for applying.
What are Bridging Loans?
Bridging loans represent a short-term borrowing solution commonly employed to ‘bridge the gap’ when acquiring a property before selling another. Unlike conventional mortgages, bridging loans can be swiftly arranged, prioritising speed and agility in financial transactions.
However, it’s important to note that bridging loans are classified as secured loans, obliging borrowers to pledge collateral, typically in property or properties. Given the potential risk of forfeiting these assets, bridging loans are sometimes colloquially referred to as a loan of last resort.
What Are the Potential Applications for Bridging Loans?
Consider the following scenarios where a bridging loan may prove beneficial:
1. You are in a disintegrated property chain and are determined to secure your dream home without setbacks.
2. You intend to purchase a property through an auction and require rapid access to funds.
3. If your goal is to downsize, a bridging loan can facilitate the acquisition of your new property, granting you ample time to sell your current home, potentially at a higher price. This approach also eliminates the stress of coordinating simultaneous buying and selling.
4. When purchasing a property that doesn’t meet the criteria for traditional mortgage financing, perhaps because it needs renovation or conversion to meet habitability or rental standards, a bridging loan can serve as a temporary solution until a conventional mortgage can be arranged.
5. In the case of land acquisition, a bridging loan can cover the land’s cost and the necessary construction work while you pursue a mortgage application.
Advantages of Bridging Loans
1. Swiftness: Bridging loans offer quick access to funds, enabling you to maintain the momentum of your property transaction.
2. Substantial Borrowing: Obtaining significant loan amounts through bridging loans is possible.
3. Flexibility: Bridging loan repayment terms can be tailored to align with your specific financial plans.
4. Expanded Opportunities: Bridging loans may open doors to securing funding for properties that traditional high street lenders might decline.
Disadvantages of Bridging Loans
1. Secured Against Property: Bridging loans necessitate collateral, typically in the form of an asset, such as a property. Failing to repay the loan can put the asset at risk.
2. Higher Interest Rates: The convenience of rapid and flexible financing comes at a cost, often manifesting as higher interest rates.
3. Additional Fees: Bridging loans may involve various fees that can contribute to their overall expense.”
Types of Bridging Loans Explained
First and second charge bridging loans
A charge is placed since a bridging loan is secured against your property. If you own the property outright, this constitutes a first-charge loan, signifying that the lender holds the primary position for repayment when the property is eventually sold.
In cases where you have an existing mortgage or loan on the property, the current loan holds the first charge, and the bridging loan becomes a second charge. When pursuing a second-charge bridging loan, seeking approval from the first-charge lender is imperative. Typically, these loans come with higher costs than first-charge bridging loans.
Fixed or Variable Interest Rates
Like regular mortgages, bridging loans offer the flexibility of choosing between fixed or variable interest rates. Opting for a fixed-rate bridging loan means paying a consistent interest rate for the entire loan term. On the other hand, with a variable rate bridging loan, your interest rate may fluctuate in response to changes in the Bank of England’s interest rates.
Open Bridging Loans vs. Closed Bridging Loans
Open bridging loans have no predefined repayment date and can be settled whenever you have the funds available. Nevertheless, lenders generally anticipate the debt to be cleared within a year, although in some instances, they might extend the repayment terms. Conversely, closed bridging loans come with a fixed repayment date and are typically more cost-effective than open bridging loans.
Bridging Loan Interest Rates
Interest rates on bridging loans tend to be higher since they cater to individuals requiring quick access to substantial funds. Due to the short-term nature of these loans, interest is typically computed daily rather than annually. Bridging loan interest can be calculated in one of three ways:
1. Monthly: Similar to an interest-only mortgage, you make monthly interest payments not added to the principal loan amount.
2. Rolled Up: Interest payments are added to the loan and are settled when you repay the bridging loan.
3. Retained: You borrow the interest upfront for a predetermined period, and any unused interest is refunded when you repay the loan.
Comparing different options is essential to secure the most favourable bridging loan interest rate. A practical approach is to engage a specialist bridging loan broker. We’ve established a partnership with the seasoned team of brokers at Chartwell Funding to provide you with expert guidance when securing your bridging loan.
Furthermore, unlike traditional mortgages, bridging loan interest rates can be subject to negotiation when you work with a reputable bridging loan broker, potentially resulting in more favourable rates.
What Costs Does a Bridging Loan Involve in the UK?
1. Lender’s Arrangement Fee: This fee, typically 2% of the loan amount, is commonly added to the total loan.
2. Administration Fee: This fee may be payable upfront.
3. Legal Fees: Part of these fees is often paid in advance to your conveyancing solicitor, with the remainder due upon loan completion.
4. Valuation Fees: The costs for property valuation can range from £900 to £2000, depending on the lender and the urgency of fund disbursement.
Securing a Bridging Loan in the UK
If you’re wondering how to secure a bridging loan in the UK, consult a specialist broker rather than going directly to a lender. These brokers will diligently research the market on your behalf and may even negotiate more favourable bridging loan rates for you.
Lenders usually require at least one property as collateral against the loan. Furthermore, the lender will seek details of your exit plan, which outlines how and when you intend to repay the loan.
Suppose you need a traditional residential or Buy-to-let mortgage for a renovated or purchased property. In that case, you’ll be required to demonstrate to the lender that you have a credible plan for obtaining the mortgage. This entails undergoing affordability checks, standard in regular mortgage lending, or evaluating the rental income you expect to generate. These steps assure the lender that you can secure a mortgage and meet any repayment obligations associated with the new loan.
Given unregulated financial products in the market, it’s advisable to engage a specialised broker, like Chartwell Funding, who can comprehensively explore the array of bridging loan options and provide expert guidance.
Bridging Loan Calculator
Utilise our bridging loan calculator to obtain a comprehensive estimate of the interest, fees, and other expenses associated with your bridging finance and receive an instant quotation. The amount you can secure through a bridging loan hinges on the value of your properties and your financial situation. The maximum loan, encompassing any retained or accrued interest, is generally capped at 75% of the loan-to-value ratio (this can contain multiple properties).
The extent of the bridging loan may also be restricted based on factors such as the property’s condition, your credit history, any essential property improvements, or the availability of funding for refinancing.
How Long Does it Take to Secure a Bridging Loan?
Bridging loans are typically granted swiftly. The approval process usually takes around 5-21 days, although, in certain instances, it can be even quicker.
Who Provides Bridging Loans?
Before the 2008 financial crisis, bridging loans were a more commonly offered financial product by mainstream banks like Nationwide, Halifax, and Santander. Back then, individuals often sought bridging loans to secure their ideal homes.
However, many mainstream banks ceased offering these loans after the credit crunch. Lloyds Bank is the sole institution that extends bridging loans, which are exclusive to its private banking clients. Today, experienced investors predominantly utilise this financial option.
In contemporary times, bridging loans are typically available from non-traditional lenders rather than central high-street banks. Entities such as United Trust Bank, Precise Mortgages, MT Finance, and a few regional building societies offer such services.
A bridging loan represents specialised financial support, and it is advisable to seek independent advice since they are typically regarded as a last-resort borrowing option. It’s essential to explore more suitable alternatives thoroughly, and for this purpose, specialist brokers like Chartwell Funding possess the expertise to help you secure such loans when needed.
What’s Involved in Securing the Optimal Bridging Loan?
When applying for a bridging loan, you’ll encounter inquiries regarding your property’s valuation, existing mortgage status, outstanding mortgage balance, available property equity, and monthly income and expenses. As a savvy step, consolidate this essential data beforehand to expedite the application process.
Additionally, your broker will outline any supplementary information you must furnish to facilitate a seamless process.
What Other Choices Exist Besides Bridging Loans?
Various alternatives are worth considering instead of opting for a bridging loan:
1. Remortgage: Depending on your financial needs, you may explore refinancing your property to release additional funds. Nonetheless, it is advisable to carefully deliberate on this choice and seek independent financial counsel beforehand. Alternatively, consider taking out a second mortgage on your property.
2. Let to Buy: Let to Buy mortgages provide a solution for acquiring your new property even when you still need to secure a buyer for your current home. This approach involves maintaining two mortgages simultaneously – a Let to Buy mortgage for your existing property and a standard residential mortgage for your intended new property. To gain more insights, refer to our comprehensive guide on Let to Buy mortgages.
3. Secured Loan: Another route is to consider a secured homeowner loan. However, akin to bridging loans, your property is exposed to potential risk if you fail to meet the repayment obligations.
4. Personal Loan: If the required loan amount is relatively modest, a personal loan might be a more cost-effective alternative to a bridging loan.’
Help From Percom Financial
Take advantage of securing the right financial solution for your needs. Contact Percom Financial today, and let us guide you through the options that best suit your situation. Your financial goals are within reach – take the first step now!