Bridging loans are used for a number of reasons but particularly by property investors purchasing buy-to-let or development purposes, if buying a distressed sale or at an auction.
In their simplest form, bridging loans are used to finance the gap between buying a new home whilst waiting for your existing home to sell so you can release the equity.
As an example, let’s say you want to buy a property for £600,000, you plan to have a £200,000 deposit and a £400,000 mortgage. But you currently only have £60,000 in cash and need your existing property to sell in order to free up the rest of the deposit.
Unfortunately, the sale of your home has just fallen through and you don’t want to risk losing your dream home which you have already paid various fees on such as surveys etc. So, you take out a bridging loan for £140,000 to ‘bridge the gap’ and repay it once your property sells.
Seems like a fairly simple solution, right? Before you make your mind up, let’s look at bridging loans in a little more detail.
Open and closed
There are two types of bridging loans. The first is an open bridge loan which has no set end date, meaning it can be repaid when the funds become available, although typically within six to 12 months.
The other is a closed bridge loan which is used when you know exactly when you will have the funds available to repay – these are normally used for shorter term loans of a few weeks or months.
But it is important to know that bridging loans can be quite costly, particularly open bridge loans (due to their flexibility), so you need to factor this into your calculations and your plan to repay.
As an example, annual rates on bridging loans can be more than 10% and can often have fees attached to the terms such as admin, legal and even exit fees.
The pros are obviously that they can provide a great short-term source of finance to help with a property purchase and in many cases can be repaid early without penalty.
The cons are that, if you are borrowing over a longer period, then the interest charges are likely to be much higher than a standard mortgage and if you don’t keep up with payments, your home is at risk.
Remember that having another mortgage-size debt is a big financial burden. Unless you know when your home sale is going to go through, it could leave you significantly out of pocket and therefore is not always the best way of beating property-chain problems.
During a property boom, like now, during which buyer demand is high, the risk is lower as the chances are your property will sell sooner rather than later.
But if the market suddenly slackens off, as it very easily could as the economic impact of the pandemic becomes reality, then buyers should take a cautious approach.
If you have been considering a bridging loan, we would advise that you consider all alternatives as well, before putting yourself in greater debt.
Have you considered selling your home to a cash buyer like WeBuyProperty? If you need to have sold your property by a certain date for any reason, feel free to contact us for a no-obligation chat about how we could help you achieve this and save you having to take out a loan.
Phone number: 0207 449 9797