When it comes to bridging loans, there’s a lot to know. In this blog, we’ll explore all the key things you need to be clued up on.
In many ways, a bridging loan is what it says on the tin – it bridges the gap between one thing and another. Because they’re intended as a short-term stopgap though, they often come with higher interest rates and extra charges, so it’s really important that you take the time to thoroughly research your options and providers before taking one out.
How do bridging loans work?
More commonly, bridging loans are used to bridge the gap between selling a current property and buying a new one.
So, why might you need a bridging loan in this situation, we hear you ask? Well, sometimes, the sale of your property might not be complete in time to put the money down on your new property. If you don’t put the money down to secure your next home in time, you could run the risk of losing it, and that’s where a bridging loan may come in handy – to make sure you don’t miss out on the opportunity.
When else can bridging loans be used?
As well as the above example, bridging loans are also used:
1) As an alternative to high-street lenders. By nature, bridging loans have a quick turnaround time between submitting your application and receiving your funds. Because of this, some people use them to finance other large purchases that are needed within a set timeframe.
2) For business purposes – including property investment, buy-to-let, and development. For example, a developer might take out a bridging loan to finance the purchase of a property and renovate it, before putting it back on the market and selling it on. Once the property has been sold (usually with a profit), the money’s then used to repay the bridging loan.
How much can you borrow with a bridging loan?
The amount you can borrow with a bridging loan will vary from lender to lender, and things like how much your home is worth, your credit history, employment status and income will all play a part in how much lenders will be prepared to give you.
Most lenders may let you apply for a bridging loan online, and, again, the speed in which you find out if you’ve been accepted and receive the money in your account will vary from lender to lender.
How long do bridging loans last for?
There’s no set term for bridging loans. Your repayment term could be anything from a month to two years or even longer. When it comes to how long you need to borrow for, there are two types of bridging loans: closed bridging loans and open bridging loans.
Closed bridging loans
Closed bridging loans require you to show your lender that you’ll be able to repay the money you’ve borrowed once a certain transaction has been made on a specific date. Typically, closed bridging loans have a higher approval rate than open bridging loans.
Open bridging loans
Unlike a closed bridging loan, an open bridging loan doesn’t require you to prove a pre-planned payment date. Because of this, they’re more unpredictable for the lender as they don’t know when they’ll get all their money back – and therefore may be harder to be accepted for.
What happens if you can’t repay your bridging loan at the agreed to time?
If for whatever reason, you’re unable to repay your bridging loan – as with any type of loan – you should let your lender know as soon as possible. Most lenders may work with you to agree on a sensible, practicable arrangement based on your circumstances.
Bridging loan lenders may charge you a fee for failing to repay on time or extending the duration of the loan. And, some lenders may also increase the interest rate attached to your bridging loan.
As with any form of borrowing, you should only take out a bridging loan if you’re confident you’ll be able to make the repayments, on time and in full, for the duration of the loan.
Bridging loan interest rates and charges
There are a handful of factors that may affect the interest rate you’re charged, and these are:
Whether you’ve applied for an open or closed bridging loan
The size of the loan compared to the value of the property
The type of security you’re offering the lender
The duration of the repayment period.
Because bridging loans exist for short-term borrowing, the interest rate attached to them tends to be higher. It’s therefore crucial that you shop around before choosing your bridging loan provider as this may help you get the best possible deal.
As well as potentially steep interest rates, bridging loans usually come with administration fees too. As an example, some lenders charge a 1% fee to arrange the bridging loan and another 1% for you to exit. That might not sound like all that much, but, for a £150,000 loan, that soon adds up to an extra £3,000.
Can you get a bridging loan if you have bad credit?