A bridging loan is a form of finance which is intended to solve a temporary shortfall in cash flow without the need for a larger debt consolidation loan. Bridging loans are most commonly used: When you want to purchase a new property before you have been able to sell your existing one. This is one of the most common uses of bridging loans. Most of us have been there.We have found our ideal new home, put in an offer which has been accepted, but cannot seem to sell our current home fast enough and the deal is in danger of falling through. A bridging loan can often be the only solution.
When you are purchasing a property to make improvements or to extend and then sell on at a profit. Because bridging loans are a short term instrument (ideally 6 months to 1 year maximum), they are well suited to this type of purchase. They conveniently fit the timescale of most ‘buy to sell’ purchasers.
When buying a property at auction. Buying at auction can easily yield savings of up to 40% on the free market price, and so it is not surprising that it has become a very popular method of purchasing a property. Typically there is as little as 3 to 4 weeks between a property appearing in the sale catalogue and it being sold. At the auction, you will also be expected to put a 10% deposit down immediately followed by the remaining 90% within 28 days. A bridging loan is very well suited to this type of scenario because of the speed at which one can be arranged.
When completing the purchase of an overseas property.
When raising fast capital for a business.
Types Of Bridging Loan
Bridging loans come in two main types, the ‘closed’ bridge and the ‘open’ bridge. Closed bridge financing is only for home buyers who have already exchanged contracts on their existing property. A lender will generally be happy to enter into this kind of loan, because it is very rare for a sale to fall through at this stage. Open bridge financing is for the homebuyers who have just found their next property, but have probably not put their existing property on the market as yet. This type of loan has a more stringent set of requirements and the lender will probably require some amount of equity in the existing property.
The Process
On average you can probably expect the process of obtaining a bridging loan to take between 7 to 10 days. In certain circumstances it can be faster, as long as you move fast enough and there are no major obstacles.Generally, once you have submitted your initial application, you should receive an offer in principle within a day or so. Assuming that you agree to their offer, the lender will arrange a valuation of the property that the loan will be secured on. This should take no more than 6 days or so. You will, of course, have to pay for the valuation, and it would certainly speed up the process considerably if you pre-deposited funds in readiness to pay the lender. On average the valuation should cost £200 to £250. During this period you should be pushing your solicitor to have the conveyancing completed as soon as possible. As soon as this process is completed you should be in receipt of your funds in very short order.
The Costs Of Borrowing
As mentioned previously, bridging loans are only intended to be a temporary form of finance, lasting no more than 6 months to 1 year. The interest rates on bridging loans are higher than on normal loans, reflecting the higher risk profile that lenders consider are taking when issuing these loans. Interest rates can be in the region of Base Rate plus 2% to 2.5% plus an arrangement fee.
Suitability Of Bridging Loans
Bridging loans are, of course, not suitable for everyone. If used correctly, however, a bridging loan is a versatile tool that enables you to achieve your goal at a reasonable cost. In times of a fast moving housing market, there is less need for these loans. We have, however, entered a slower period in the UK housing market, and are consequently seeing an increase in demand for bridging loans. As always, do your own research, contact several different lenders and compare rates, and if in any doubt as to the suitability of this product for your personal circumstances, consult your IFA.
