17 Aug What is a Bridging Loan?
When buying a residential property in the UK your average house purchaser goes nowhere near a bridging loan. So says the received wisdom on the topic. Most people have no idea of the whys and wherefores of bridging finance. Mainly because most of us have no call to ever have one.
However, what if you’re buying a house and all is so far, so good. Contracts have been exchanged on the house you wish to buy. The chain above you is safe. You are a week away from exchanging on the property you live in and wish to sell.
All of a sudden (and it always is) disaster strikes. The people moving into your house decide they don’t want to buy and you are left high and dry. You’ve got somewhere to live but are unable to move into it. That’s because you now no longer have the funds needed.
Doing The Maths
Your £100,000 deposit on your £500,000 house was made up of a mixture of savings and equity. The remaining £400,000 was a mortgage. You are £100,000 light and due to exchange contracts in one weeks time, what do you do?
Enter the bridging loan, designed with just this situation in mind. It’s objective – to ‘bridge the gap’ between your sale and purchase. For example purposes only, of the £100,000 deposit you were putting down, £20,000 was from your own savings. This means your shortfall to go ahead and buy the new property is £80,000.
Therefore, you need a bridging loan of £80,000 to complete your purchase and have enough to continue selling your home.
Your first port of call should be the lender with whom you have arranged your mortgage for the new home. They will be in the best position to assess you quickly. They can get a valuation done (possibly done already?) and make funds available within a week or two.
Does your own bank or building society do bridging loans? Maybe they just don’t want to lend to you on this basis. Now is the time to start looking around and you are spoilt for choice.
Where Can I Get a Bridging Loan UK?
As you can see from the link here for the top ten UK bridging loans, this is a specialist market and not one for the unwary, first-time investor. Bridging loans come in 2 flavours. Regulated for the residential homeowner market and non-regulated for the buy-to-let, retail investor.
You may not have heard of any of the lenders listed in the top ten products here. However, you can get a bridging loan from pretty much any High Street lender. And of course your own bank or building society.
Bridging loans have 2 ways of being lent and that is as either a closed loan or an open one.
A closed bridge comes with a specific end date. It is usually a few months in duration while an open bridge is precisely that. It comes with no end date but an expectation it will be paid back within 1 year.
How Much Do They Cost?
Some two-thirds of UK bridging loans are made for the business sector, primarily for the buy-to-let investor market and for use at property auctions where funds must be shown upfront to ensure the person has the capacity to buy.
The cost of a bridging loan can be very expensive especially once the various fees have been added on. Bridging loans are usually expressed in monthly terms as they are short-term products. They may look cheap to begin with, but rates are somewhere between 0.4% per month up to 2%pm. As 2% of £100,000 is £2,000, add the other moving costs and things can start to look a little scary.
It may be best to look for a broker in cases where money is tight. They should be able to source the best deals on the market saving you a tidy sum in the process. We do not do bridging loans at present. However, a search with a well-known search engine will produce lots of results.
Other fees to consider are the lender’s arrangement fee which could be anything up to 2% of the loan amount. This can usually be added to the loan. Then there’s a valuation fee of around £250 plus an admin fee from the lender which could take another £250-300 and not forgetting their legal fees of £450-500.
If you use a broker they will charge you another % of the loan and this could again be anything up to 2% of the loan but is normally more like 1%. Don’t forget this is all before you pay any actual interest on the loan too and you can see just how expensive this can be as a way to borrow money.
First Charge, Second Charge
Something else to look at when applying for bridging finance is the type of charge which will be put on your property as in either a first or second charge.
There may be a difference in cost from your lender when applying the first or second charges but it shouldn’t be too far apart. A first charge simply means that the lender with the first charge gets first dibs on your
property should you default on the payments. If they have a second charge they have to wait for the first charge holder to get their money back first before they get a chance to take whatever is left from the proceeds of the sale of your home.
Hopefully, it would be enough to settle the outstanding debt.
Pros And Cons
That’s about it as far as the world of bridging finance in a nutshell goes. The pros of using a bridging loan uk are that they are flexible, are pretty quick to set up and you could have access to a large amount of money up to the low millions if need be.
However, the cons are that they are almost prohibitively expensive, interest rates can be very high and they are secured against your home so if the worst happens and you default on the loan, the worst could get even worse and you could also lose your home.
That doesn’t really bear thinking about so we’ll end with the possibility that everything has gone according to plan, the buyers changed their minds again at the last minute and didn’t pull out of the purchase of your home and you don’t need a bridging loan after all……… that’s better.
It’s worth quickly mentioning here that alternatives to bridging finance could be straightforward loans like Personal Loans and Short Term Loans which may do the job for you in a similar manner and which we here at Badger Loans can do something to help you with. Good luck.
We hope this helps.