Bridging Loan for Property Purchase
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Bridging Loan for a Property Purchase - how does it work?
When you need to move fast to buy a property, a bridging loan could be the best way to achieve your goals. There are pros and cons to this high-value, short-term loan.
What is a Bridging Loan?
Bridging loans are short-term, high-interest rate loans that people often use to purchase a property before selling their existing home.
Bridging loans can ‘bridge’ the gap between the sale and completion dates in a chain, or when you need to buy or sell a home quickly. Sometimes called Bridging Finance, the normal term for a bridging loan is 12 months.
When would you use a Bridging Loan?
The most common reasons to take out a bridging loan include:
- To buy a property before your current home has sold – You can then pay off the loan as soon as your house sale has completed.
- To break a mortgage chain – Become a ‘cash buyer’ rather than part of a chain, which makes you a more attractive purchaser.
- To buy a property at auction – Buying at auction can get you a home at a bargain price, but you often need to pay in full within 28 days. This time frame is too short for a traditional mortgage.
- To get a Buy to Let property quickly – Landlords sometimes need to act fast to buy good value properties to rent out to tenants.
- To improve cash flow – a regulated bridging loan can also be used as short-term finance when cash is tight. Both businesses and individuals can adopt this approach.
What are the features of a Bridging Loan?
Bridging loans have a few unique features. First, they are no longer widely available from high street lenders – you will often need to seek out a specialist company for this kind of loan.
They are very quick to arrange as the aim is that you will repay the loan as soon as possible. The lender doesn’t then need to check whether you can afford monthly payments, so you are usually approved quickly.
An advantage of Bridging Loans is that you can defer paying interest on the loan until the end of the term, instead of paying monthly interest as you would on a mortgage. This does mean that your total loan amount needs to include the cost of the interest.
You can also get a high Loan to Value (LTV) with a bridging loan. Most lenders will lend up to 75% LTV. To maximise the size of a bridging loan, you can secure it against both the property you’re buying and existing property.
Finally, Bridging Loans are fairly flexible products and there are rarely any early repayment charges or legal fees.
How much does a Bridging Loan cost?
The full cost of a Bridging Loan depends on a few factors: the overall size of the loan, the interest rate and the arrangement fee. You may also need to pay valuation fees for the property you’re buying.
As an illustration, let’s say you wanted to buy a property priced at £300,000 with a Bridging Loan. A lender might offer you a 75% loan totaling £225,000. The arrangement fee could be around 2% – which would total £4,500. If the interest was charged at 0.5% per month and you paid the loan back after 6 months, the total interest total would be £6,750.
So the overall cost will be the interest plus the arrangement fee: a total of £11,250. Remember that you may also need to pay stamp duty on the purchase.
How can a Mortgage Broker help?
At Pia Financial Solutions we have helped many home buyers gain the property they want with a Bridging Loan. We’re highly experienced in property finance of all kinds and will explore the market on your behalf to find the best rates.
Some clients aren’t even aware that a Bridging Loan could be the solution for their property purchase, yet it’s an approach that can be very successful. The secret is for us to understand your specific situation, your priorities, and ambitions – then find the right products to match.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
Some Bridging Finance is not regulated by the Financial Conduct Authority