A bridging alone is essentially an advance, given by a lender to tide the borrower over until an expected source of income comes in. These days the term is most often used in reference to the purchase of property. Typically a bridging loan is used to facilitate a move between properties where a party has had an offer accepted on the house they want to buy, but are having trouble selling. The loan is obtained to fund the purchase of the house and stop the deal falling through on the understanding that the borrower will be able to clear the debt once the impending sale of their own home goes through.<\/p>\n
Alternatively, it may be used by somebody who needs to raise finance quickly and doesn\u2019t have time for a mortgage to be arranged, for example, someone whose bought a property at auction and needs to pay before the agreed settlement date. Likewise, a developer might use a bridging loan if the property they\u2019re buying is uninhabitable and cannot be mortgaged.<\/p>\n
Normally, you\u2019ll be able to borrow up to 80% of the equity of your property and the loan will last for a term spanning from a few months to a year or more. There is usually a minimum amount you can borrow between \u00a310,000 and \u00a330,000.<\/p>\n
There are two types of bridging loan:<\/p>\n
Closed:<\/b> This is where you have a clearly defined arrangement in place for obtaining the capital to clear the loan. For example, you may have already exchanged on the sale of your property and, therefore, are able to demonstrate to a lender that your sale is unlikely to fall through.<\/p>\n
Open:<\/b> This is where the sale of the property you are moving out of is not yet assured. Obtaining finance in this scenario is much more difficult and lenders will need to find ways of assuring themselves that you\u2019ll be able to repay them.<\/p>\nWhat Interest Rates Can I Expect?<\/h2>\n
Bridging rates are not cheap. In general you\u2019ll be charged interest monthly at between 2% to 3% above the base rate set by the Bank of England<\/a>, on top of which you\u2019ll need to pay an arrangement fee which could cost you as much as 1.5% of the loan value. Even ignoring the fee, if you work out the rate in terms of APR, it will be in the region of 20% or so, more than double what you’d expect to pay on a mortgage.<\/p>\n In general, the lower the interest rate on offer, the higher the arrangement fee you\u2019ll be charged and vice versa. Getting the best deal for you depends on the amount you are borrowing and how quickly you expect to repay the money. If you have a set date by which you are confident you\u2019ll be able to clear off the loan, calculating whether a higher fee or a higher interest rate will favour you is a simple business.<\/p>\n Defaulting:<\/b> These loans are only cost effective in situations where they prevent the chain of your move falling apart and thus ensure that the money you\u2019ve spent on all the previous arrangements won\u2019t be wasted.<\/p>\n It\u2019s imperative that you have an exit strategy in place otherwise you could end up lumbered with a mortgage-sized loan with a very high rate, which on top of your actual mortgage, you\u2019ll likely find impossible to pay. As a result you\u2019ll have no choice to default and may even have to consider becoming insolvent<\/a>. As you\u2019ll see below, given the securities your lending against you\u2019ll have a lot to lose.<\/p>\n Double Security:<\/b> Some lenders will demand not only your current home, but also your new property as security. This means both could be at risk if you are left unable to get rid of the first. Again it needs to be stressed, you should be highly confident of selling the first property if you\u2019re taking a bridging loan to facilitate a move. (On a more positive note, offering both properties as security will make the loan cheaper.)<\/p>\n Lack of Regulation:<\/b> Bridging loans only have to be regulated if they are \u2018first charge\u2019. (This means they are the primary source of finance being used to buy the property. This would apply if there\u2019s no mortgage in place, or if you aren\u2019t going to be using a mortgage.) If they are second charge, they won\u2019t necessarily be subject to regulation. Given the consequences you could face if the loan becomes unmanageable, you may prefer to have the option of complaining to the financial ombudsman<\/a>.<\/p>\n Become a Cash Buyer:<\/b> If you\u2019re not going to be using a mortgage to purchase your new property you are essentially a cash buyer. This can help you wrangle a discount as this is generally how people prefer to be paid. It can also help you save costs such as arrangement fees or commission to mortgage brokers<\/a>.<\/p>\n Only Pay For The Credit You Use:<\/b> In most cases there are no fees for early repayment so you only pay for the credit for the period in which the gap between purchase and sale actually needs to be \u2018bridged\u2019.<\/p>\n Save A Chain Collapse:<\/b> Whilst bridging loans are expensive, so is the process of arranging a move. If things fall apart the money you\u2019ve spent on valuations, surveys and other such costs of moving house<\/a> will have been for nothing.<\/p>\n Speed:<\/b> These loans can be arranged very quickly. Indeed, with some lenders you may even be dealing in hours rather than days, let alone weeks or months. This is vital if you are looking to save a chain.<\/p>\n Retained Interest:<\/b> You will normally have the option to avoid paying interest on a monthly basis. Instead you can defer and pay it all at once when your lump sum comes in.<\/p>\nWhat Are The Risks?<\/h2>\n
What Are The Benefits?<\/h2>\n