A bridging loan gives people short-term access to money at an interest rate. They are most often used as a way of purchasing a new property while waiting to sell your current home.
As well as providing home-movers with a way of bridging the gap between selling a property and moving to a new location, they can also be useful commodities for people buying at auction or are planning to quickly flip a recently renovated home.
Bridging loans give you access to huge sums of money, between £25,000 and £250 million, depending on the valuation of your property. Putting a number of properties forward will allow you to borrow even more, with lenders providing you with a quote based on the loan-to-value (LTV) that can range up to 80% of a property’s value.
As there isn’t a ‘one size fits all’ loan, it’s important that you familiarise yourself with the different types of bridging loans available to you. By doing your research, you can ensure you’re choosing the right type of loan for your situation.
All bridging loans are set at fixed-rate, meaning that the same rate of interest will be set across the duration of your loan, making your payments the same each time. The benefit of a fixed-rate loan is that you know exactly how much you’re repaying, giving you more certainty over your finances.
Closed-bridge loans are for people who have a clear exit strategy and a fixed date for repaying their loan. An example of this scenario is when someone selling a property has signed contracts but is still waiting on payment which will be used to pay off the bridging loan.
An open-bridge loan, on the other hand, is riskier, as there is no set date for paying off the loan. These situations usually happen when people want to buy a new house but have not yet sold their current property. Another example is an investor looking to renovate a property before selling it and repaying their loan.
Also known as development exit finance, this type of loan is used to repay outstanding finance against a property development once the project is complete. These are most commonly used when a developer has built properties on a development facility, but they need more time to sell.
With a developer exit bridging loan, applicants can give themselves more time to make sales, reduce their rates lower than traditional development finance and free up funds to begin working on their next project.
When applying for a bridging loan, you can typically expect to receive a decision within just 24 hours of submitting your application. In most instances, you’ll then have to wait roughly 14 days for all necessary finance checks and balances to be processed – from property valuations to the money transfer itself.
As well as the interest that you’ll need to pay, bridging loans also include a number of fees that must be taken into consideration if you’re thinking of applying for a loan. Some of the fees you may be expected to cover include:
Here’s a typical example of a bridging loan to help you visualise how much you could end up paying overall. In this instance, we’ve compared a loan of £100,000 at two different interest rates.
|Loan term||1 month||6 months||12 months|
|Total to repay||£103,687||£105,972||£109,914|
|Loan term||1 month||6 months||12 months|
|Total to repay||£103,343||£109,908||£117,786|
*Fees in this example are based on: 1% facility fee, £250 valuation fee, £35 bank transfer fee, £295 admin fee and £450 legal fee. Fees may differ and are based on the value of your property and the size of loan.
When considering a bridging loan, it’s important to ensure you are aware of the various pros and cons that factor into high-cost transactions. Ensure you know the advantages as well as the risks that can come with opting for a bridging loan.
Like any financial transaction, it’s crucial that you take everything into account. There are a number of benefits to securing a bridging loan, so make sure you choose the right type of loan for you and ensure that you have planned out your repayment method.
As the UK’s leading development finance and bridging loan specialists, our experts at Positive Commercial Finance can help you find the best financing solution for you and your business. If you have any questions or would like to learn more about bridging loans, don’t hesitate to get in touch.