Designed as a temporary cash flow solution, we explain how bridging loans can be used by businesses and for property purchases.
Bridging loans are a form of short term lending designed as a temporary cash flow solution for businesses and those buying property. They are typically used to 'bridge' the deficit in funds between the sale of one property and the purchase of another and involve remortgage of the original property (usually any amount up to 65% its value minus any outstanding mortgage amount) to fund the new purchase.
To enable completion on the new property as quickly as possible, after an application has been made and a valuation carried out on both properties, funds are usually made available within a week. However, as bridging loans are a short term solution and are less secure from a lenders point of view, interest rates do tend to be elevated beyond regular mortgage rates. For this reason a bridging loan should only really be considered if sale of the remortgaged property is likely within a period of approximately 6 months. As with other types of borrowing, the interest rate charged will be based on your personal circumstances and the amount borrowed and will vary between lenders.
Although the term of a bridging loan is agreed prior to lending, this period can be extended if needs be. For this reason many lenders charge interest on a percent per month basis, so the longer the loan term, the more interest you pay. There is also likely to be an arrangement fee charged which can be a fairly significant amount.
If the contracts for both properties have been exchanged and you are simply waiting for the transfer of funds, you are likely to be eligible for a closed bridging loan. These are preferential both from a lenders and borrowers perspective as fewer sales fall through at this stage so lending is less risky. For this reason closed bridge loans are likely to attract lower interest rates. However, if you are fairly confident that completion will occur in a very short period of time i.e. under a month, then you may be best to choose a bridging loan with a low arrangement fee as you won't be paying interest for an extended period.
Open bridge loans are likely to attract a higher rate of interest as this form of borrowing occurs when an offer has been made on a new property prior to putting the existing property up for sale. These are seen as more risky by loan providers as they are statistically more likely to fall through. As these types of loans tend to be over a longer term, a company offering lower interest rates would be preferable.
Providing you have a strategy in place to cover the possibility that the sale or purchase of one of the properties may fall through, funds to cover interest payments and confidence that both sales will have completed within a short term period, bridging loans can be an incredibly convenient way to close the gap between the purchase of a new property and the sale of an existing one.
