Bridging finance is one of the most misinterpreted forms of finance. A lot of individuals and businesses are hesitant to use bridging loans just because they don’t understand them. That being said, the use of bridging finance London has increased over the past few years in the UK. Bridging loans today are an excellent way to get access to the funds instantly to close a great deal.
What is a Bridging Finance?
A bridging loan is a short-term loan that can be used in numerous situations where you need to borrow funds for a short term until a permanent form of finance becomes available. Bridging finance is generally used when you need funds to buy something new while you wait for the funds after you sell something. For instance, in the real estate industry, this type of loan is often used by people looking to buy a new property while they wait for the old property to get sold. A bridging loan is a secure loan, which means you need to keep a high-value asset as a security to apply for it.
How does a bridging loan work?
Unlike a traditional mortgage, bridging loans are not dependent on your income, but on the value of the property you own. It can be secured across multiple properties to raise the necessary funds. The maximum amount you can borrow, with interest, is usually limited to 75% loan to value. Let’s understand the process of bridging loans with an example.
• Let’s say you wish to buy a new home worth £600,000.
• You need £150,000 to pay as a deposit, and the rest of the money you plan to borrow through a mortgage.
• You have only £30,000 in your savings, and you need £120,000 more to pay for the deposit.
• But, you are waiting for your current home to get sold, which is valued at £300,000.
• So, you take a bridging loan of £120,000 against your property to pay for your deposit and repay the loan when your old property gets sold.
Bridging loans allow you to borrow anywhere between £25,000 to £10 million, which is often repaid within a year or so. Bridging loans are of two types – open and closed
Open Bridging Loans
With an open bridging loan, there is no definite repayment date. The borrower can repay whenever the funds become available. However, this loan usually lasts up to a year, or even longer, depending on the lender.
Closed Bridging Loans
With a closed bridging loan, the repayment date is fixed. The date is usually decided when you know when the funds will become available to repay what you owe. This loan is ideal for people who need to borrow funds for a very short time, lasting just a few weeks.
Since open bridging loans are more flexible, they usually have a higher interest rate than closed bridging loans. Whether you opt for a closed or open bridging loan, you will need to show clear evidence of how you are going to repay before you take out the loan.
Bridging loans are further classified into first-charge and second-charge loans. When you apply for any type of loan, the provider sets ‘a charge’ to the property you are using as a security. It is a legal agreement that decides which lenders will be repaid first in case you default on repayments.
First-charge loans
If you own the property that you are keeping as a security while taking out a bridging loan, you would take out a first-charge bridging loan. Mortgages are usually first-charge loans, but if you don’t have any outstanding mortgage, then a bridging loan is your first-charge loan. That means if you fail with repayments, the bridging loan will be repaid first when the property is sold.
Second-charge loans
If you have an existing loan or mortgage on the property, then it will be the first-charge loan and the bridging loan will be the second-charge loan. Second-charge lenders are required to get permission from the first-charge lenders before they provide bridging loans. Second-charge loans usually have higher interest rates than first-charge loans.
How much does a bridging loan cost?
Since bridging loans are taken for a short term, repayments are made monthly rather than annually.
• Monthly interest – Range from 0.5% to 2%.
• Arrangement fee – The amount you pay to set up the bridging loan.
• Valuation fee – Paid to the surveyor to estimate the value of your property.
• Legal fee – Required to be paid to the lender’s conveyancing solicitor.
• Administration fee – This is the amount you need to pay to complete all the paperwork.
• There might be other fees too, so keep this in mind while choosing your bridging loan lender.
What Can You Use a Bridging Finance for?
Bridging finance can be used in a range of circumstances for both personal and commercial purposes. This includes:
• Buying a home
• Property development
• Buying buy-to-let properties
• Buying industrial equipment
• Buying property at auction
• Leveraging new business opportunities
How to Apply for a Bridging Loan?
You can consult a specialist broker, like BridgingFinance4U that can help you get funds from the leading bridging loan lenders in the UK. You will require to keep at least one property as collateral against the loan. The lender will also ask you to show an exit plan, explaining how and when you will repay the loan. Here’s a step-by-step process to find the best rate bridging loan.
• Figure out how much bridging loan you need, for how long and for what purpose?
• Gather crucial details, such as your property worth, existing mortgage and equity available on the home. Also, present your exit plan.
• Get rates from multiple lenders and choose the best suitable bridging loan.
• Read all the terms and conditions about monthly repayments, arrangement costs and other fees.
• Once you apply for the bridging loan, wait for the application to get approved. This could take about 24 hours.
I• f your application gets approved, the amount will be credited to your bank account in around a week or so.
A bridging loan is considered a high-risk loan. Hence, it is strongly recommended that you consult a bridging loan specialist, such as BridgingFinance4U. Our expert advisers will help you find the best deal from different lenders with minimum fees. You never miss our offer and bridging finance quote
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