As the name implies, a bridging loan is a short-term solution that ‘bridges the gap’ between finance – useful if you are looking to purchase a home before selling another, or if you are looking to buy property at auction and need to have the funds in place.
Two types of loan are available – ‘Closed’ loans have a fixed repayment date, ‘Open’ loans don’t have a fixed date, but as a short-term solution, it’s highly usual for them to be repaid within 12 months. Either way, as with all mortgages, lenders will require evidence of why the loan is needed and how/when it will be repaid.
When you take out a bridging loan, a ‘charge’ is placed on your property as security that your lenders are repaid as a priority, should you default or fail to repay your debt.
Those who own their property, mortgage-free, would take out a first charge loan, whereby the bridging loan would be repaid first if you fall behind on repayments.
However, if you have a mortgage on your property, it would be classed as a second charge loan. In this case, failed repayments would result in your home being sold off to repay your debts, with your mortgage taking priority.
Due to their nature of being short-term solutions, bridging loans are typically quite expensive, particularly when compared with normal annual mortgage rates, with fees of 0.5-1.5% every month, on top of which you should be prepared to pay lender set-up fees.
With regard to how much you can actually borrow, this can ordinarily be anything over £25k, but there is usually a limit of how much you can borrow – a figure based on the loan-to-value (LTV) mortgage ratio of 75% of the value of your property. However, if you are mortgage free and are taking our a first-charge loan, you may be able to borrow more than if you were taking out a second charge loan.
If a bridging loan is something you are considering, please talk to us – as independent, whole of market advisers, we can talk you through the options available to you – it may well be that there are alternatives options better suited to your own specific circumstances.