If you have invested in the property market then you must have come across the term ‘bridging loan’. It is a common form of loan that is taken by investors when buying properties. The market for bridging loans has become bigger in the recent years. Bridging loans UK can be used to fund projects that need quick cash. Investors or property owners apply for this type of loan as it is quick and easy to process the loan. Getting long-term loan is a complex and time-consuming process; the bridging loan can fill in the time gap and help you pay for the property so that you don’t miss the opportunity due to lack of fund.
People who buy at auction need this money more than anyone. When you bid for a property at an auction and win the bid, you get very little time, often 28 days only, to pay the price for the property. It is difficult to obtain a mortgage or other forms of the long-term loan within such a short period of time. Those who buy at auction usually have the intention of renovating the property and selling it off quickly. If you have a confirmed seller, then the banks may be willing to give you a loan. However, you will rarely be in such stage.
Usually, people don’t know how quickly they will be able to sell their property after buying it from the auction. So, a bridging loan is a perfect option to support for the period of purchasing the property and selling it out.
Terms of Bridging Loan
The bridging loan is very expensive. The interest rate is 1% per month. The arrangement fee is 1% of the total loan amount. There is also an exit fee of 1%. No matter whether you take the loan for 2 months or 12 months, you must pay these fees. If you need more time to pay back the money, you can roll up the fees and interest payments and include them in the new mortgage. A standard mortgage would be less costly than the bridging loan. High loan-to-value (LTV) mortgage can be an alternative to the bridging loan.
There are more than 150 bridging loan providers in the UK. As there are so many lenders, the interest rates and fees can vary. So, you need to do research thoroughly before choosing a lender. In the UK, you can get a loan from £50,000 to £1 billion. The loan period can be from 1 day to 36 months. But generally, you will be bridging loan for up to 12 months.
You will need to have your property as a security. The lender will charge for the securities. The first charge is taken when you don’t have any mortgage on your existing property. The second and third charges are taken when the mortgages of the existing properties are not cleared.
Some lenders also take other assets like jewelry, vehicles, gold, art, etc. as security. This type of loan is easy to get and you don’t necessarily need to have a good credit history. So, even if you had cases of defaults, CCJs or Bankruptcy, you will still be able to apply for these loans. In case of bridging loan, you don’t need to pay the interest every month; you will have to pay it once you clear the payment. So, in most cases, proof of your income is not required.
How do Bridging Loans Work?
Bridging loans help people purchase a property before their existing property is sold. It also helps home movers to fill in the gap between the sale date and completion date. These loans are short-term high-interest loans. As it’s difficult to obtain loans from a bank, the number of bridging lenders has increased.
Types of Bridging Loans
There are two kinds of bridging loans: open and closed. In case of a closed loan, the repayment date is fixed. With an open loan, the repayment date is not fixed, but you will need to pay it off within a year. With either type of loan, you will need to show the lender evidence of repayment strategy. You will also need to show that you are purchasing a new property and at what price.
Cost of Bridging Loans
Bridging loans are very expensive. You need to pay high interest and other fees as well. You can pay the interest rate in three ways. First of all, you can pay it as a monthly interest. Second, it can be deferred interest in which you pay all the interest at the end of the month. Third, is the retained interest in which you borrow the interest from the lender and they pay it off later on. There are various fees involved including the arrangement fee, exit fee, administration fee, legal fee, valuation fee and broker fee.
You should have a realistic exit route. The best way is to sale one or more properties. You can also exit by refinancing. So, you can take a mortgage and pay off the loan.
Individuals and even international banks can give you bridging loans. They are very easy and quick to get. Your loan can get approved within 24 hours also. Once it gets approved, your property will be valued and the lender will transfer the money to your account. So, if you are planning to buy a property in order to sell it at a higher price after some time, then you can apply for a bridging loan. Even in cases where you cannot apply for a traditional loan, you can apply for the bridging loan. Though this loan is expensive, you will be able to purchase a property on time and think of getting good returns from it.