A bridging loan is a short-term flexible loan that can be arranged much more quickly than many other alternatives, but what else do you know about this fast-growing finance option?
Bridging finance uses
The majority of bridging loans are used to quickly complete property purchases and are particularly useful for purchasing a home before the borrower’s existing home has been sold.
Bridging finance can also be used for renovation work on the property, and for property purchased at auctions.
Outside of bricks and mortar though, bridging loans are also available for individuals and businesses. A company can use a loan to raise capital for non-property related purposes, such as temporary cash flow issues.
Bridging loan types
There are two main types of bridging loans – open and closed. A closed loan has a fixed repayment date, while an open loan has no fixed date.
The bridging loan length
Bridging loans are short-term deals that usually last from six to nine months, though it is possible to find loans for up to two years.
An open bridging loan has no fixed repayment date, but the borrower will be expected to repay the loan before the loan period expires.
If a bridging loan is repaid early, there are normally no early repayment fees charged. This makes them very flexible, as the earlier repayment can be made, the less interest is charged.
The value of the loan
Property is normally used to secure bridging finance. A bridging loan is usually for a percentage of the value of the property, which can be between 70% and 75%.
Interest rates and fees
Interest rates on bridging loans are generally more expensive than for a standard long-term mortgage. Expect to pay between 1% and 1.5% a month. Interest could be higher on loans assessed as high risk.
There will normally be arrangement fees for the loan, though these may be added to the loan rather than having to pay them up front. Legal fees will also be charged.
Bridging loans can be arranged quickly, and it is possible for a loan application to be approved within a matter of hours. A standard mortgage may take weeks to arrange, which is why bridging loans are useful to speedily complete purchases on property and be repaid when mortgage funds are available.
Exit strategy and affordability
To successfully apply for a bridging loan, you will need an exit strategy, which is a plan for when and how the loan will be repaid.
You can elect to pay interest on a regular basis during the loan term. In this case, the lender will need proof that you can afford the payments.
If there is no other mortgage on the property, a bridging loan is protected by the Financial Conduct Authority (FCA). This organisation makes sure the lender and the bridging broker act ethically and fairly.
Where to apply for a bridging loan
At Ascot Mortgages, we are experts in arranging bridging finance. Thanks to our relationships with a number of lenders, we can match your bridging finance requirements with the best bridging finance provider. Talk to Ascot today for bridging finance advice.