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Your Quick and Easy Guide to Bridging Loans

Bridging loans are a unique type of loan product, designed to help people purchase a property before they’ve sold their existing home. If you want to buy a new home, before you lose your chance, but you haven’t sold your old property yet, then a bridging loan could be the perfect solution.

As well as giving home movers a fantastic opportunity when there’s a gap between the completion and sale dates in a chain, this type of loan can also be very useful to people planning on selling a property quickly after they’ve renovated a new home.
Now that banks and building societies are less willing to lend in the age of a financial crisis, the number of bridging loan lenders on the market has been growing at a rapid pace. However, it’s important to remember that bridging loans aren’t necessarily right for everyone.

Here’s what you need to know about the basics of bridging loans.

Bridging Loans vs Mortgages: What’s the Difference

The biggest difference between a bridging loan and a standard mortgage is the duration. Usually, you’ll take a mortgage out for about 25 years (or more). However, bridging loans typically only last for about 12 months. Another major difference of bridging loans is that mortgage rates can be a little cheaper for some borrowers than bridging loans. That’s because the lender is taking on more risk with this type of loan over a shorter period of time.

Bridging lenders, on the plus side, won’t be worried about things like your personal income. This means that it’s much easier to get this kind of loan even if you have low earnings. Additionally, bridging loan lenders won’t be worried about the kind of rental income that the property could produce, because the property could easily be empty for the entire length of the loan.

Another major point to note about bridging loans is that the condition of the property won’t matter much. What’s more, bridging finance is typically much quicker and easier to arrange than getting a mortgage.

Who Can Get a Bridging Loan?

So, what does it take to apply for a bridging loan? Well, there are a number of considerations that loan providers make when considering your eligibility for this kind of cash. Loan providers may restrict their offers for bridging loans to people who get a new mortgage from the same company – although this won’t always be the case. Additionally, loan providers may require you to use your property as a security.

In some cases, to successfully get a bridging loan, you’ll need to show your proof of income, however this isn’t necessary in all cases. You may also need a business plan you’re planning on using your loan for business purposes.

Are There Different Kinds of Bridging Loan?

Yes, today’s lenders can either choose a closed bridging loan or an open loan. A closed loan will require you to know exactly how you’re going to pay the money you owe over time. This means letting your lender know what funds you’ll be using for the loan from the outset. An open bridging loan doesn’t require the same kind of exit plan.

Open bridging loans are usually used as means for cash in an emergency or urgent transaction. You won’t need to provide detailed plans on how you’re going to settle the debt, and therefore open bridging loans can be a more time-effective solutions in urgent circumstances. You may have up to 12 months to repay your debt in this case.

How Much Can You Borrow in a Bridging Loan?

The amount of cash that you’ll be able to borrow with a bridging loan will depend on a number of things. For instance, one point that you’ll need to keep in mind is “Loan to Value”. The LTV rate in a bridging loan is the size of the loan divided by the price of the property. For instance, a loan of £100,000 on a £200,000 property would have an LTV value of 50%.

In a mortgage, the value of the property is always based on the lower cost of either the property’s current value or the purchase price. In the case of bridging loans, the same rules apply in most cases. However, there are some bridging lenders that will always lend specifically based on the current market value – ignoring what you paid for your property. Some bridging lenders also offer their loans based on something called the Gross Development Value. This refers to the price of the property when you’ve completed whatever work you plan to do on it.

If you can find a bridging loan lender who will give you the money that you want to borrow based on an assessment of market value, as well as one that will contribute to the cost of the work by lending based on GDV, you might be able to borrow more money.

How Do You Get the Right Bridging Loan?

Just like any lending opportunity, there’s no one-size-fits-all when it comes to picking the perfect bridging loan. There are many things that you’ll need to consider when choosing the lending option that’s right for you. For instance, one of the first things you’ll need to think about is whether you’re applying for a first charge or second large loan.

A second charge loan applies to a situation wherein you already have a loan secured against a property with an outstanding mortgage. This means that you might be getting loans for improvements like an extension with your loan. The distinction will allow your lender to determine who has priority over repayments if you’re struggling to pay off the money you owe by the end of the term. On the other hand, if you’re taking out a brand-new loan against a property, then this will be a first-charge loan.

Another point to keep in mind is whether you’re paying fixed rates or variable rates for your loan. If you’re looking to pay predictable and stable bills each month, then a fixed rate of interest will know how much you need to pay throughout the entire term. This is because you’ll agree on the rate before-hand. However, you might end up paying extra as you pay for your security. However, a variable rate is subject to change over time, however you might save money depending on what the current base rate might be. If security isn’t overly important to you, a variable rate will give you a chance to save when the market is good.

How Much is the Interest on Bridging Loans?

The interest rates that you pay on a bridging loan can differ depending on the company or bank that you choose to borrow money from. Because the loan period of a bridging loan usually lasts a little while, you’ll be able to pay off what you owe in interest in a number of ways. For instance, you might decide to pay what you owe on a monthly basis, or by adding it to the balance of your loan. You can also pay your interest in a rolled-up deal when the full repayment is due.

Depending on the interest strategy that you choose, you can make it easier and more affordable to use your bridging loans for things like buying properties, initiating property developments, investing in buy-to-let properties, and more.

What Kind of Fees Come with a Bridging Loan?

There are many pros and cons to using a bridging loan. The biggest benefits of this loan type is that you get to access the money you need most very quickly – a lot faster than if you were applying for a mortgage. You can also apply for a large amount of money, with options for flexible borrowing too. However, there’s also some risk involved with the fact that your loan is secured against your property, and there may be higher interest rates to consider too.

Another thing to keep in mind is that there can be other fees involved with a bridging loan too, such as an arrangement fee to set up the loan, and an exit fee if you decide to pay back whatever you owe early. You may need to pay valuation fees too.

How Can You Get a Bridging Loan?

It’s easier than ever to apply for a bridging loan in today’s digital world. There are countless mortgage brokers, banks and specialist lenders that offer this kind of lending option. These loans are much more accessible than they used to be today, but it’s still important to do your research and make sure that you’re getting a good deal before you jump straight in.

The good news is that once you find a deal that’s right for you, it’s usually possible to get a decision on your bridging loan within 24 hours of submitting your application. After that, you’ll need to wait around 2 weeks for the right checks to be made and processed, so that you can access your money.

Emu.co.uk is NOT a direct lender and our loan-matching service is free to use. We don't charge a fee, but there might be a charge from some lenders within our network. Emu is a trading style of Ready Money Capital Ltd. Emu.co.uk does not make lending or credit decisions, we are not a lender - as a broker we match customer's loan applications with lenders in our database depending on the information provided. Ready Money Capital Ltd is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register under reference number 802557. Licensed by the Information Commissioners Office (registration number ZA441875).

Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk. Emu is a broker, not a lender, and does not make credit decisions.