Bridging loans are a facility used by home movers, property developers and landlords. A bridging loan facilitates the purchase of a property that without short term finance would not be possible. Bridging loans are seen as a stop-gap and short term measure. Due to the nature of this financial product they can be a lot more expensive than a normal long term loan or mortgage product.
If you are moving home and need to move quickly on the property you want to buy you may look to getting a bridging loan to enable you to purchase your new property while selling your existing property. Bridging loans are also an option for developers looking to purchase a property and sell quickly or buying at auction.
Interest rates on Bridging loans can be as high as 18% per year and there is specific criteria you will need to meet to enable you to get a bridging loan. We cover these in this guide.
When to use a bridging loan
Bridging loans can be used for a variety of reasons at a variety of stages. From property investment to buy to let and development. Bridging loans can sound like a good idea but think carefully before you take one out. As they are a short term option it is important that you have the ability to pay off the loan in the near future. This could be from the sale of a property or a different mortgage product. It is a good idea to speak to an expert financial advisor before taking out a bridging loan. There is no guarantee that you will be able to sell your home or be accepted from a mainstream lender for a mortgage. This is something to think about and ensure you have an exit strategy in place.
Where to get a bridging loan?
Bridging loans can be accessed through a variety of places from small loan companies to specialist lenders who can offer very large bridging loans. If you are looking to take out a bridging loan it is advisable to speak with a regulated broker who will be able to assess your circumstances and search all of the market to find the most suitable financial product for your needs.
Bridging Loan Rates
Bridging loan rates will vary depending on your personal or business circumstances, if you have bad credit in the past this will affect the rate you will be offered. Another factor will be the size of the deposit. The larger deposit you have the more competitive deals will be available. Bridging loan rates can vary from 0.44% to 1.5% per month. When looking at this type of finance it is important to understand the interest you will pay and have an exit strategy that will allow you to pay off the loan. Using a specialist broker from Get Me My Mortgage will allow you to get expert advice and our experts will search the whole of the market to get you the best rates for your bridging loan.
Understanding the true cost of a bridging loan is important and should be explained to you before you take out this kind of finance. Below is an example to give you an idea of the monthly interest you will pay on a bridging loan.
If you take out a bridging loan for £100,000 and the monthly interest rate was 0.45% this would mean that your total monthly interest payment would be £450. If the interest rate was higher at say 1% then the monthly interest payment would be £1000. There may also be an arrangement fee charged by the lender which varies from lender to lender. If the arrangement fee was at 1.5% of the loan value and the loan was £100,000 this would be an extra cost of £1500, this is usually added onto the loan and will not need to be paid upfront.
Bridging Loan Cost
The total cost of a bridging loan will be clearly communicated to you if you are using a specialist broker. This is vital when working out the total cost especially if you are using this for development as it will affect your projected profit. The below is an example of a client purchasing a property at auction that needs investment before it is able to be sold. The purchase price is £500,000 and the client has a deposit of £200,000. The clients projections mean they will need the loan for 8 months.
A client is purchasing a £500,000 investment property at auction, which needs refurbishment. They must raise £200,000 to complete the purchase. This will be secured using a 1st legal charge over the new property and is needed for 6 months.
At the end of the 8 month term, the client will be selling the property once refurbishments have been completed.
As an example your specialist broker could raise the funds needed using a bridging loan at a rate of 0.60% per month, with a 1.5% lender arrangement fee.
0.60% Monthly Interest
£9,600 (£1,200 per month)
1% Lender Arrangement Fee
£2,000 (added to loan)
As you can see above the total repayable is £211,600
The total cost of borrowing the £200,000 for an 8 month period is £11,600. In addition to this fee it is likely that you will need to pay a valuation fee.
Is a bridging loan right for me?
Bridging loans have a variety of uses and can be a great decision in many circumstances. A Bridging loan can be used to downsize in retirement, save the trouble of being stuck in a chain or exit a property project.
If you are in any of the following situations then a Bridging loan might be for you.
- The property you want to raise money against is not in an acceptable state to currently get a mortgage
- Traditional lender will not accept your application
- You need to funds very quickly and a traditional lender cannot facilitate this
Whatever your reason for looking into bridging loans it is vital that you have an exit strategy plan to ensure that you don’t end up extending or being unable to pay back the loan. Whether it is refinancing or selling an asset it is essential to plan.
Get Expert Advice
Bridging loans are specialist financial products and it is advisable to speak with a specialist who has experience with this kind of finance option. Your specialist will be able to guide you through the process and ensure you have an exit strategy in place. For more advice and to find the best deal call us today or fill in one of our enquiry forms.