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What is a bridging loan?
A bridge loan is a short-term loan that uses your property as security. It’s often used to buy a new property before selling the old one, which can be risky because you’re taking out two mortgages at once. They are also often used to buy properties that would not qualify for a standard mortgage with a view to improving them and refinancing again later.
‘Regulated’ or ‘Unregulated’ bridging loan?
The difference between a regulated and an unregulated bridging loan is simple, but it can make all the difference when you’re looking to buy or sell a home.
A regulated bridging loan is one that’s tied to a bank or building society, which means that it has been approved by the Financial Conduct Authority (FCA).
This means that you can get the money from your lender and pay it back over a set period of time—usually around two years. Regulated bridging loans are intended for properties that are to be occupied by the borrower or the family.
An unregulated bridging loan is one that isn’t tied to a bank or building society, so it isn’t officially regulated by the FCA. However, many lenders offer unregulated bridging loans as well as regulated ones, so you’ll need to do some research before choosing where you want to apply.
If arranging a regulated bridging loan, make sure the company giving the advice is on the FCA register.
Unregulated bridging loans are for properties that are to be for investment use.
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When to use a bridging Loan?
A chain break is a situation where you need money quickly because you have found yourself in debt. If you find yourself in this position, it may be better to apply for a bridging loan than trying to get out of debt using other methods such as credit cards or payday loans.
Bridging finance can be used to buy properties that aren’t in good condition or have certain features missing, like kitchens or bathrooms. This is especially useful for developers and landlords who want to buy a property, refurbish it, and then either sell it or refinance it with a buy to let mortgage.
Buying a property at auction
When you buy a property at auction, you must pay a 10% deposit on the day of the auction, with the rest of the agreed purchase price required within 28 days. This period can sometimes be even sooner! A bridging loan is used to buy properties at auction because they can be set up quickly, ensuring that purchases can complete within the required time frame.
If you wanted to find out more information about property auctions, a popular one is Allsop.
A bridging loan can be a good option when you need to purchase something quickly and don’t have the available funds. The loan is secured against equity in your property, so it can be a good way to access capital.
The downside is that you will need to repay the loan relatively quickly, so it’s important to make sure you can sell the item you’ve purchased for a profit.
Bridging loans for business cashflow problems can help you raise funds to deal with cashflow issues.
New business start-up
You can use funds from a loan to start any new business venture as long as you have a reliable exit route to repay the loan.
Probate and inheritance
Probate, which is the legal process that follows someone’s death, can sometimes require extra funds to settle debts, release property charges and pay off bills.
Buy a property under value
Some bridging lenders allow you to borrow against the open market value of a property, not just its purchase price. This can be useful when buying a property that is selling for less than it would normally.
A bridging loan lets you pay off a debt and keep your property if it’s due to be repossessed. You can use the loan to sell the house on your terms instead of having it taken away by the lender.
Developers often need to bridge the gap between the sale of their property and the receipt of their final payment. Bridging finance is a short-term loan that can be used to cover this period. The loan will be repaid on completion of the project when the developer receives their final payment.
What are the lenders requirements for taking out a bridging loan?
In order to take out a bridging loan, you will need to have an exit strategy. You may also need to have your home valued. If you don’t have an exit strategy, then it’s likely that your lender won’t approve your application.
The lenders will want to know what percentage of the property value you own, and how much equity you have in that property. If you’re planning on moving into a new property shortly after taking out the bridging loan, then it’s likely that they’ll be happy with this information. However, if your planned exit is further away than 6 months, then they may ask for more information regarding how long it will take for you to sell or rent out this property.
Additionally, bridging finance is not assessed in the same way as other types of mortgages and loans that are backed by property. Bridge loans do not require monthly repayments, so it is not necessary to consider income and affordability in the same way.
Also, the lender will want to know how you intend to use the money. Your loan can be used for any legal, reasonable purpose, but the lender will need to approve your plans. Read more about: Bridging Loan Criteria here.
Open and closed bridging
The biggest difference between open and closed bridging loans is how long the loan lasts.
Open bridging loans are typically paid back within a year, while closed bridging loans can last for up to five years. Both types of loans are designed to give you enough time to find a new home or sell your current one, but if you need longer than a year, a closed bridging loan may be better for your situation.
Another difference is that closed bridging loans may not be available through all lenders.
Advantages of a bridging loan?
Bridging loans are fast. When you’re in a bind, you need your money quick—and that’s exactly what a bridging loan can offer. These loans are designed to get you cash quickly so that you can move forward with your project or business with minimal delays.
Bridging loans are flexible. Not only do bridging loans provide an immediate influx of cash, but they also give you the ability to repay them over time as needed. This means that if your income is unsteady or uncertain, this type of loan will still work for you!
Bridging loans are available for all types of property. If you have land or property that needs some work done before it can be sold on the market or rented out, then a bridging loan could help fund those improvements while still giving you access to capital right away!
What are the disadvantages of a bridging loan?
The biggest disadvantage is that the interest rate is usually very high. This means that if you take out a bridging loan, you’ll have to pay the money back quickly—and it could mean that you’re paying more than you would on a normal mortgage.
Another disadvantage is that it’s essential to have an exit strategy in place before taking out a bridging loan. You may want to sell your current home first, or perhaps rent it out while waiting for your new home to be built or finished. You’ll also need an exit strategy in case your new property doesn’t work out—if something happens and you have to sell or rent out your new home after all, you’ll need somewhere else to go!
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What is the bridging loan process?
The process for getting a bridging loan is pretty straightforward. You’ll need to speak to a mortgage adviser about your situation and how much money you’ll need, then they’ll put together an application.
This will include information about your income and employment status, as well as details about what you’re looking for in a new home. The value of the property you’re interested in buying will also be assessed by an independent valuer.
Once all the necessary paperwork has been submitted with all the correct information, it should take no more than six weeks for everything to go through. When everything has been approved, your solicitor should draw up the legal documents needed for completion (the last stage of buying a house).
Is a bridging loan expensive?
There are a lot of factors to consider when comparing the cost of different bridging loans.
Interest Roll Up
This is the interest you pay on your loan, even if you don’t use it. This can be a big expense for borrowers, so make sure you’re aware of it when comparing different lenders’ offerings.
Lender Arrangement Fee
This is a fee that the lender charges for arranging and managing your loan. It’s usually paid upfront, but some lenders may make it part of your monthly payments.
A lender will charge this fee when they sell or transfer their business to someone else.
These are costs associated with getting legal documentation sorted out before closing on your loan.
These are fees levied by third-party administrators like agents and brokers who help lend money to borrowers in exchange for commission payments from lenders or investors who want access to those loans through them instead of directly from borrowers themselves (which can be cheaper).
You may need a valuation report completed on the property or asset you’re planning to buy. You need to factor in the cost for this whether this is a standard valuation or a homebuyers valuation.
Default interest rates
If you don’t pay back the money on time, some lenders may charge an additional fee (called default interest rate) as compensation for their loss of income from the interest they would have earned if the money had been returned on time.
A default interest rate is often higher than what you would pay for normal interest because of this risk factor associated with not repaying money on time (and because of the administrative costs that come along with processing late payments).
Can I get 100% bridging finance?
It depends on the lender and the situation.
You can get 100% bridging finance if you’re willing to use additional security (like your house) as collateral. But this is risky, because if the property doesn’t sell within the time frame of your loan, you could end up defaulting on your mortgage and losing your home!
What to Consider before taking a bridging loan?
When you’re thinking about taking a bridging loan, there are a few things you should consider first.
First and foremost, you need to have an exit strategy. What will happen when the loan is paid off? Do you plan on buying another property, or are you going to be able to pay it off and move on with your life? If not, what are your plans for how you’ll get by after your loan is finished?
You also need to be sure that this loan makes sense financially. Make sure that the interest rate isn’t too high—you don’t want to pay more than you have to! And make sure that the monthly payments are manageable. You don’t want to end up paying more than what you borrowed in interest and fees.
Alternatives to Bridging
As you probably know, bridging is a way to get funding while you wait for the sale of your property. But there are some other ways to do it:
Buy to let mortgage
You may be able to apply for a buy to let mortgage with an interest rate that’s lower than your current one.
Commercial bridging finance
This option is similar to buy to let, but it’s for businesses rather than individuals. You can use this alternative if your business needs capital during a transition period and hasn’t yet secured funding from another source.
Brokers arranging commercial bridging finance will likely be members of the National Association of Commercial Finance Brokers.
This option can help you refinance all or part of your existing property portfolio so that you can access more funds without having to sell any properties.
Invoice finance allows businesses to borrow against their invoices without selling assets or equity in their business. It’s a great way for small businesses with tight cash flow problems because it allows them to get funding quickly and easily without having any impact on their day-to-day running costs or sales figures.
If you have equity in your current property, or if your new home is worth more than your current home, then secured lending may be a better option for you. Secured lending allows you to borrow against the value of your existing property to purchase another one. The interest rates are usually lower than those of bridging finance, and they have no early repayment penalties.
Unsecured loans are based on your credit history and financial situation without the use of collateral. This type of loan has a higher interest rate than other financing options because it comes without any guarantees—if you fail to repay it, there’s no guarantee that the lender will ever get their money back. However, this type of financing can also be easier to qualify for if your credit score is low or if you don’t own any assets that could be used as collateral for. If you want more details about your overall credit history, you can go to Check My File to sign up for a free trial.
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Why use a bridging loan broker?
Bridging can be complex. There are lots of different types of bridging loans, with different terms and conditions, and you need to know what sort of loan is right for you. If you don’t know what to look for, or if you don’t have time to work out all the details yourself, a broker can help.
Bridging brokers have access to a wide range of lenders and can present your application in the best way possible so that they’re more likely to give favourable terms.
To speak with an experienced bridging loan broker for tailored advice, please complete the contact form.