If you have found a property you wish to purchase but do not have the required amount at the moment, you need to act quickly, as someone else may buy the property. To ensure a speedy purchase, bridging loans can be an option for you. Bridging finance has become a popular funding source, especially during the pandemic, and is now mainstream. Additionally, peer-to-peer lending platforms offer bridging loans to attract more users. Considering a bridging loan can be a wise decision if you do not want to lose out on your dream property.
This article will explain how a bridging loan can facilitate a fast property purchase.
How Does A Bridging Loan Work?
Bridging finance is a short-term loan that gives you quick access to funds, usually secured against collateral. While the property is the most commonly accepted form of collateral, some lenders may also accept valuable assets like jewellery. Depending on the lender, borrowers can take out amounts ranging from £50,000 to £10 million. The loan amount primarily depends on the value of the property and the borrower’s equity in it, with a maximum loan-to-value ratio of 70%. Borrowers seeking higher amounts can use multiple properties as security for the loan.
Unlike mortgages, bridging finance is not linked to the borrower’s income and requires a security property and a strong exit strategy to secure a loan. Repayment can be made through the sale of the property or by obtaining funds through a long-term funding option like a mortgage.
How To Choose The Right Bridging Loan For Property Purchase?
To make an informed decision about choosing a bridging loan to buy a property, it is important to be aware of the following:
Loan Amount You Need
Determining the precise amount of money you need to purchase a property is crucial. It will ensure you get the correct amount of financing required. If you take out too much, you’ll pay more interest charges. Conversely, you may not have enough funds to complete the purchase if you borrow too little. Therefore, it’s important to calculate the exact amount you need and only borrow it.
Loan Terms
When considering a bridging loan, it’s important to determine how long you require the loan. Remember that the longer the loan term, the more interest you’ll pay. Therefore, finding lenders that offer flexible loan terms and comparing their offerings is advisable. It will allow you to select the loan term that best suits your needs while minimizing interest charges.
Property’s Value
The amount you can borrow with a bridging loan is directly tied to the value of your property. Therefore, it’s important to have an accurate valuation of your property. Unlike mortgage lenders, bridging lenders may accept properties in poor condition or uninhabitable, providing more flexibility in terms of collateral.
Exit Strategy
A clear exit strategy is crucial when applying for a bridging loan. An exit strategy outlines how and when you plan to repay the loan. A well-defined exit strategy can increase your chances of loan approval. The stronger your exit strategy, the more confident lenders will be that you can repay the loan on time.
Existing Mortgage
If you already have a mortgage on your property, this will impact the bridging loan you can take out. Your options may include a first-charge or a second-charge loan, depending on the terms of your existing mortgage. It’s important to understand how your current mortgage will affect your bridging loan options before applying.
Select The Loan Type
Various types of bridging loans are available, and the right one for you will depend on your specific circumstances. Here are two of the most common types:
Open Bridging Loan
Open bridging loans do not have a fixed end date, so you can repay them whenever you have the funds available. Typically, these loans have a duration of up to one year, although in some cases, they may last longer.
Closed Bridging Loan
Closed bridging loans have a fixed end date based on a specific date when you know you will have the funds available to repay the loan. Because these loans are less risky for lenders, they typically come with lower interest rates than open bridging loans.
Consider The Additional Cost
In addition to the interest rate, there are other costs associated with taking out a bridging loan that you need to consider. These costs include a facility fee, typically around 2% of the loan amount and cover the lender’s costs for arranging the loan. You may also be charged a valuation fee by a surveyor who visits the property to assess its value and provide a valuation report. Some lenders may require you to pay their solicitor’s fees and legal costs.
If you decide to repay the loan early, you may have to pay an exit fee, typically around 1% of the loan amount. If you’re working with a broker to obtain the loan, you must also pay a broker fee. These expenses can add up, making bridging loans an expensive way to borrow money. It’s important to consider these costs when determining whether you can afford to take out a bridging loan.
Purchasing A Property With a Bridging Loan
Bridging finance can be a suitable option when you need quick access to funds to complete the purchase of a property or when you want to move quickly, as traditional financing options like mortgages and bank loans may take time to be approved. Bridging loans are known for their speed, and you can expect to receive the funds in your account within two weeks.
Bridging lenders also offer more flexibility regarding eligibility criteria than traditional lenders, as you can obtain a loan even with a poor credit score. Additionally, bridging loans can be secured against different commercial, residential, and mixed-use properties.
Conclusion
A short-term bridging finance secured against property or valuable assets, used to access funds for property purchase quickly. Repayment is typically made through the sale of the property or a long-term funding option. The loan amount depends on property value and equity, with a maximum loan-to-value ratio of 70%. Bridging lenders offer flexible eligibility criteria, including potential approval for borrowers with poor credit scores.
Overall, bridging finance can be a suitable option when you need quick access to funds to complete the purchase of a property or want to move quickly, as traditional financing options may take time to be approved. Bridging loans are known for their speed, and borrowers can expect to receive the funds in their accounts within two weeks.