Bridging loans are a short-term finance option for those looking to buy a property. And just like many other financial products, bridging loans come in all different shapes and sizes.
Most bridging loans are closed - this means they have a fixed end date where you know your funds will be available to repay it. Open bridging loans have no fixed date, and are used when you've not yet agreed the sale of your home.
You can think of a bridging loan as a temporary option to get you from A to B. This makes them very handy in property chains - you can take out a bridging loan to plug the gap between buying a new property and money coming in from the sale of another.
When the loan term is up, the balance of the loan plus interest will be covered by the profits from the sale.
But this isn’t the only use for a bridging loan. This guide looks at other bridging loans examples, when they can be used and how different types of bridging loans work.
We update all our guides regularly. If you are researching bridging loans and we haven't got an exact guide that helps you, keep coming back as we update daily.
The big selling point of a bridging loan is that you can get money far quicker than you can through a conventional mortgage. Instead of the process taking weeks or months, with a straightforward enough case, you can be approved for a bridging loan in a matter of days.
This makes bridging finance attractive when looking to:
Some lenders may even loan you money for non-property purchases via a bridging loan given that you still put up your home as security. This makes bridging loans a flexible finance option for those with a realistic plan of how they will repay the loan at the end of the term.
There are two different types of bridging loan: closed and open. Which you choose will depend on whether or not you have a fixed date on which you want to pay it back.
With a closed bridging loan, you have a fixed end date. This is the time when you can be confident your funds will be available. You have to be clear with the lender from the start what your exit strategy is - that is, where the money to pay off what you owe will come from.
Closed bridging loans are the more common of the two. They are common in situations where contracts have been exchanged, but there is still a wait before the sale completes.
As there is a fixed date when the lender knows that they'll get their money back and a clear picture of where it's coming from, these are deemed lower risk. This means that interest rates are usually lower than in open bridging loans and terms are only a few months long.
In comparison: shorter term, lower interest rate. Must have a fixed date and exit plan.
With open bridging loans, there is no such fixed end date where your money is due. This also means you don't have to provide a set-in-stone plan for how you'll repay the money.
Open bridging loans could be preferable in a situation where a homeowner has found their dream home and want to buy it, but haven't yet found a buyer for their current home. They also might be tempting to property developers wanting a quick loan to do up the property before putting it on the market and paying back the loan with the proceeds from the sale.
In this case, the term of the loan could, in theory, last as long as it takes to sell the house. But many lenders aren't keen on this. This makes these loans far less common than their closed counterparts, and many lenders set a time limit of two years to pay the debt anyway.
In comparison: longer-term, higher interest rate. More flexible repayment timeline.
Bridging loans also vary based on whether or not the property you are putting forward as security already has a loan or mortgage secured against it. Whether the bridging loan is a first charge or second charge lets the lender know who has priority on recovering their money.
First charge loans are where there is no existing mortgage. The lender gets the security that they would be first in line to recover their money if the house had to be sold to make repayments. As such, they can typically offer better interest rates. Bridging loans on residential properties are also always regulated by the Financial Conduct Authority.
Second charge loans are for people who already have a mortgage to pay off. Here, the mortgage would be paid off before the bridging loan if your house was sold to pay your debts. Lenders are less keen on this and therefore may not offer as attractive rates.
Time to crunch some numbers. Let’s assume a family want to downsize from their current home valued at £300,000 to their dream home that’s on the market for £200,000. They want to secure buying the new house immediately but they don’t yet have a buyer for theirs.
Here are the details of the bridging loan they are approved for.
|Loan Term||1 Month||3 Months||6 Months||12 Months|
|Total to repay||£102,650||£103,950||£105,900||£109,800|
In this case, the family will likely be hoping for a quick sale. The longer it takes you to raise the money to repay the loan (i.e. sell the house) the more interest you pay. Closed bridging loans will require a repayment date to be set when you apply, so this will be an open loan.
Here at Money Savings Advice, we have partnered with some of the UK’s leading Bridging Loans brokers. They have already helped thousands of people get the best Bridging Loan deal and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.
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