The bridging loan is typically used to solve a temporary lack of cash that may come when buying a new business or house. Basically, bridging loans are a very short-term mortgage.
Online PR News – 10-February-2010 – – As with Mortgages, bridging finance needs to secured against property. Often Bridging Loans are used as short-term finance when buying or selling properties in order to pay for renovations or to simply bridge the gap between buying a new property and selling your current one.
Fast bridging finances allows you to borrow the money you need over a short term and then pay it back as soon as you have completed the sale of your home. However, since bridging loans are very short term you need to be prepared to pay a larger interest rate and higher fees than traditional loan.
Types of Bridging Loans
There are two types of bridging loans that you need to consider the 'closed' and the 'open' bridge. A closed bridge loan is only given to homebuyers who have already sold their current property. Closed bridge financing is easy to get since very few sales fall through once the exchange has been made.
When it comes to open bridging finance this is for buyers who have found their perfect property, but haven't put their current property on the market yet. A bank will be very cautious with this type of Bridging Loan and will likely need a lot of support information before approving. You may not even be approved by property bridging loan lenders unless you have a lot of equity in your current property.
How a Bridging Loan Works
Property bridging loan lenders need to see the mortgage offer for the new property, all the necessary property details and other proof that you are currently trying to sell your existing property. The bank will also ask you questions about how you plan to meet the interest payments that come with bridging loans and ask what exit strategy you have if a sale doesn't happen after a few months.
Often property bridging loan lenders will have a 12-month limit on an open bridging loan. After this period, the lender may be willing to renegotiate if you have paid your interest and the property market hasn't completely collapsed.
Consider Interest Rates
All types of bridging finance require high interest rates. Often it will be set with the Bank of England bank rate and an additional 2% to 2.5%. You can also expect an arrangement fee that ranges from 0.5% to 1.5% of the total loan amount. Depending on the lender, you may pay higher for interest rate, but have a lower arrangement fee. Some lenders offer quick bridging loans and are fast at issuing cash, but you can expect to pay a high price for these types of loans. Whether you choose a loan that has higher interest or lower arrangement fees will depend entirely on your unique circumstances. If you know your home is going to sell within a few weeks then you should go with a low arrangement fee. However, if you think it may take several months or longer to pay your loan then the fee is just going to be a small amount compared to how much you are going to have to pay overall for the bridging loan.
Since the UK property market is soon expecting a slump and more mortgage lenders are offering less financing, many home sales aren't going through. If you know for a fact that you home can be sold and you have a good credit history then a bridging loan may be a good option. However, if not then be careful when considering bridging loans because you don't want to be stuck with two mortgage-sized debts to repay.