Need to raise money fast and thinking about a bridge loan? Here’s what you need to know…
A bridging loan is worth considering if you require fast access to funds for a brief period. Sam Covington from bridging broker Finbri explains that “Fast bridging loans are an increasingly sought-after solution for people who have investment properties and wish to leverage those assets in order to raise cash to acquire another.” There are many uses of bridging finance and these loans could help you proceed with your latest project, such as acquiring a new property despite awaiting the proceeds from the sale of a previous one, pay inheritance tax or just simply raising cash urgently. This guide will explain bridging finance and highlight why it might be worth considering for your unique situation.
Forms Of Bridging Loan
The most common forms of bridging loans are open and closed.
- Closed Loans
When you obtain a closed bridging loan, you know precisely when to repay it since repayment terms are agreed upon contractually. You will repay this type of loan according to your loan term. Also, you will likely get this loan type if you are awaiting a property sale after exchanging contracts.
- Open Loans
Open bridging loans have no known repayment date. Still, many lenders will expect you to repay them within twelve months. Your broker or lender will likely want some evidence of a reliable repayment strategy before giving you access to an open bridging loan. This proof can be equity sold from a property or taking out a mortgage. Additionally, your lender will demand to see the house you are purchasing and how much you want to buy it. Finally, you may also need to prove that you are taking the right steps to find a buyer for your present property if necessary.
First And Second-Charge Bridging Loans
A property assessment will be carried out on your house, and a charge put on it when you use bridging finance that’s secured against your property. This charge is a binding deal that outlines which lenders will receive their money back first if you cannot pay back what you owe. If you default with repayment, your house will be taken as collateral by a first and second charge bridging loan. Furthermore, if your property still has a mortgage, your bridging loan becomes a second charge one. This reality implies that you will pay back your mortgage before the loan if you fail to make some payments and have to sell your house to pay back what you owe. On the other hand, in the event that the property belonged to you completely or you were repaying your mortgage completely with bridging finance, you will receive a first charge bridging loan. In this case, you will pay back the bridge loan first if you can’t keep up with repayment.
Bridging Finances Expenses
Bridging loans are usually priced monthly instead of annually because they are short-term. Compared to a standard longer-term mortgage, they are more expensive, with monthly costs ranging between 0.5% to 1.5%. As a result, bridging loans are more costly than your average mortgage. Moreover, you can pay about 2% of your preferred loan amount in set-up fees. Therefore, it is prudent to only consider bridging when you are sure it is for the short-term.
Borrowing With Bridge Loans
You can turn to brokers to receive £25,000 to £5 million in cash but the amount you can borrow will be based on the security you intend to put in place and the capital available in that security. It is also typically possible to obtain larger amounts where you borrow a first-charge loan, compared to a second-charge loan.
Other Options
You can sign up for a let-to-buy mortgage contract if you want to move elsewhere but don’t wish to put your property up for sale. For this, you can remortgage your current property and buy a new one using the equity you free up.
