What is a Bridging Loan?
Written by: John Mussi
A bridging loan as the name implies is a loan used to "bridge" the financial gap between monies required for your new property completion prior to your existing property having been sold.
A bridging loan is in simple terms a short-term mortgage that is secured against the property that you are selling, with the money that is lent being used to complete the purchase of the new property. Because of the nature of their use, bridging loans can be arranged in a very short period of time, usually around seven to ten days, which is important when you need to complete on the purchase or risk loosing the property.
Bridging loans are short term loans arranged when you need to purchase a house but are unable to arrange the mortgage for some reason, such as there is a delay in selling your existing property. Timing is of the essence when selling one property and buying another. Sometimes if you are looking for a new home and the right property becomes available, it is not always possible to wait until your current home is sold.
The beauty of bridging loans is that a bridging loan can be used to cover the financial gap when buying one property before the existing one is sold. For example, if you are in a chain, where you are buying a property at the same time as selling a property, it's possible that you'll be put in the situation where you need to complete your purchase, but the funds from your buyer are not available. You are now under pressure to complete on a particular date but do not have the funds available. This is where bridging loans come in. They are looked on as short term lending to cover a specific short term need.
Bridging loans can be arranged for any sum between £25000 to a few million pounds and can be borrowed for periods from a week to up to six months. Because of the nature of bridging loans they can usually be arranged at short notice and within a few days. Bridging loans are widely available and can usually be arranged by your existing mortgage provider.
A bridging loan is similar to a mortgage where the amount borrowed is secured on your home but the advantage of a mortgage is that it attracts a much lower interest rate. While bridging loans are convenient the interest rates can be very high. When considering a bridging loan please remember that you may be paying not only for the bridging loan but also for the mortgage on your existing property. Although bridging loans are convenient, you need to consider the pitfalls too, like the high interest rates.
The downside to the fast nature of these types of loan is that the interest rates charged on them are relatively high, this is because not only are they short-term and for large amounts, but the risks to the lenders of non-payment are higher than for other circumstances and this is taken into account when the loan rates are calculated. Although the rates are high when compared to other loans available on the market, when you take into account the short amount of time over which this interest is charged, and the benefits that a bridging loan can bring, the costs are reasonable.
Bridging loans are designed to provide you with the equity from your current home in order to make your new purchase, before you are able to sell your own property. The loan is secured against the home that you are selling in the form of a mortgage or second mortgage, and will allow you in general to release around 65% of the property's value. With these funds you are then in a position to complete the purchase of the new property, and once your old property sells you can clear the bridging loan. If you are considering such a loan, you should be confident of a sale, and that you will be able to clear the debt within six months, as the high interest rates are something that you do not want to be paying long-term.
Bridging loans are available to the people that have found it more difficult to get mortgages, such as those with an adverse credit rating. This enables these people to build a track record before applying for the traditional mortgage. Bridging loans can take from 48 hours at the shortest to around ten days if the circumstances are more complex.
Despite the costs, bridging loans are very popular, after all if you have spent a lot of time searching for the perfect property you will not want to miss out on it because of a relatively short delay in the sale of your current property. It is in these cases where bridging loans can prove invaluable, enabling you to secure the sale of the home that you want, and concentrate on the sale of your property at a later date.
Bridging loans can be provided for:
Renovations or refurbishment
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About the Author
John Mussi is the founder of Direct Online Loans who help UK homeowners find the best available online loans via the http://www.directonlineloans.co.uk website.
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