Some people have heard of bridging loans but still don’t fully understand what they are. A bridging loan is a short term funding option for people who need money quickly. They can be a short term loan in emergency circumstances, but mostly they refer to property transactions. The only thing with this kind of loan is that they can be more expensive than a regular loan. Let’s go into more detail:
What is a Bridging Loan?
This loan ‘bridges the gap’ for you between buying a new house and selling your old one. Some even use a bridging loan to buy a house at auction. This is because you will need the deposit money on the spot, but may not have sold your previous property yet.
The demand for bridging loans has risen in recent years, as people want to secure their dream homes as fast as possible. You should know that getting a bridging loan to buy a property without having a buyer lined up for your current property is a risky move.
A bridging loan can help those who will own two properties during the transition period and won’t have enough money to do so. The only way to get the best deal for a bridging loan is to make sure you find the right broker.
How do Bridging Loans Work?
There are two kinds of bridging loans:
- Open – an open bridging loan has no fixed repayment date, but you will be required to pay it back within one year. If you go for this type, you can pay interest as you go along or when you pay it back altogether.
- Closed – a closed loan has a fixed repayment date and is normally used if the sale on your old home hasn’t been completed yet but is in motion.
Pros and Cons of getting a Bridging Loan
- Option to pay interest later.
- Quick arrangement.
- Fees, legal fees and broker fees.
- High interest rates.
The company who gives you a bridging loan will need to see how you plan on paying them back. For example, with the money you make from selling your house. You’ll need to give plenty of details, including how you plan on selling your property and on the property you are buying. You’ll also need a plan B, so you must pre-empt your plan falling through and what you’ll do about it. It’s only a good idea to take it out if you know you’ll be able to pay it back in a short time.
A bridging loan will usually come with terms of 1% of the sum borrowed, plus 1% every month after. When taking out £500,000 to pay for your dream home, this means you’d be £10,000 in debt in the first month. There are other options. You could potentially include the fees and interest in your mortgage.
Bridging loans aren’t the only option for you. It would usually be cheaper to take out a high loan-to-value mortgage. Bridging loans shouldn’t be your first choice.
For more information on if a Bridging Loan is suitable for what you need please call one of our advisers. Just complete the contact from on our Bridging Loan page.
DISCLAIMER: These articles are for information only and should not be construed as advice. You should always seek advice prior to taking any action.