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A Bridging Loan Should Be Viewed As A Short Term Financial Solution

Home buyers who are seeking solutions to their short-term financial issues may have heard about bridging loans but may not know what they are. Fortunately, our expert team at Warren Powell-Richards is on hand to give you all the information you need about what these loans are and when you can use one.

What Can I Use a Bridging Loan For?

A bridging loan is a short-term borrowing solution that is commonly used as a bridge between selling your property and buying another. Typically, a bridging loan can be used to:

• Bridge the gap if your home buying chain falls through.
• Purchase a property at an auction.
• Purchase buy-to-let properties quickly with no mortgage or deposit in place.
• Purchase a fixer-upper which is unmortgageable.
• Develop a property.

How Does a Bridging Loan Work?

A bridging loan is different from a standard mortgage since it isn’t tied to income. You can borrow amounts from £50,000 up to as much as £10 million, however, this type of loan can be risky since it must be secured against some form of collateral, typically a property which you could lose if you cannot repay your loan.

The amount of the loan will depend on equity and usually, the maximum amount you can borrow is 75% LTV (loan to value) including interest. The lender will also want to know how you plan to pay off the loan before granting you the money. There are several different exit strategies but the most commonly seen include:

• Property sale – you repay the bridging loan once you complete the sale of your existing property.
• Cash redemption – this is a good solution if you expect a pension pay out or the maturing of an investment soon.
• Flipping – you repay the loan once you’ve completed the work on the property you’ve bought and resold it.

Are There Other Costs Associated with Bridging Loans?

A bridging loan often incurs other fees as well as your interest repayments such as:

• Administrative fees
• Valuation fees
• Arrangement fees
• Legal fees
• Broker fees

Often, these will be a percentage of your total loan, and checking the amount you’ll pay before signing the agreement is essential.

Is There More Than One Kind of Bridging Loan?

You may have either a closed or an open bridging loan. With an open bridging loan there is no fixed repayment date, but you’ll usually have to make full repayment within one year. With a closed bridging loan, you’ll have a fixed date for repayment and therefore, being accepted is more likely and the rates are usually more favourable.

What Are the Advantages and Disadvantages of Bridging Loans?

Advantages:

• It’s quicker and easier to get a bridging loan than a mortgage.
• You can finance purchases not covered by standard mortgages.
• You can borrow high amounts from £50,000 to £10 million.
• You can arrange repayment terms to suit you depending on your planned exit strategy.
• You can use them for many different property buying scenarios.
• You can usually avoid an early repayment charge with a bridging loan.

Disadvantages:

• The interest rates are high
• There may be costly extra fees.
• You put your assets at risk if you take a bridging loan out.

Is There an Alternative to A Bridging Loan?

Although a bridging loan could be the solution you’ve been looking for, there are some other options which could suit you better depending on your circumstances. These include:

• Obtaining a secured loan
• Remortgaging your home
• Taking out an unsecured personal loan
• Getting a let-to-buy mortgage
• Asset refinancing

If you’re ready to buy a property, give Warren Powell-Richards a call to find out more about how we can help. Alternatively, check our website at wpr.co.uk to see some of the local properties we have listed for sale.