17 Aug Bridging Loans in the UK
What Are They? – Where Can I Get One? – How Much Do They Cost
What is a Bridging Loan?
When it comes to buying a residential property in the UK your average house purchaser goes nowhere near a bridging loan, if they’re lucky. So says the received wisdom on the topic. Most people have no idea of the whys and wherefores of bridging finance and that’s 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 so the chain above you is safe and 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 and the people moving into your house decide they don’t want to buy and you are left high and dry with somewhere to live but unable to move into it because you now no longer have the funds needed because your buyers have gone awol.
Your £100,000 deposit on your £500,000 house was made up of a mixture of savings and equity from the now-defunct sale of your home and 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 in order to ‘bridge the gap’ between your sale and purchase. As let’s say for example purposes only that of the £100,000 deposit you were putting down, £20,000 was from your own savings meaning your shortfall is £80,000 needed to go ahead and buy the new property while concurrently selling or putting your own sale on hold.
Therefore, you need a bridging loan of £80,000 to complete your purchase and have enough to continue selling your home without time becoming a major factor.
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, get a valuation done (they’ve probably done that already so could dispense with this time-consuming part of the process) and make funds available within a week or two.
If your own bank or building society either don’t do bridging loans or just don’t want to lend to you on this basis, it’s time to start looking around and you are spoilt for choice.
Where Can I Get a Bridging Loan?
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 or business bridging finance market.
You may not have come across few or indeed any of the lenders listed in the top ten products sorted here by interest rate but you can get a bridging loan from pretty much any High Street lender and of course your own bank or building society.
Apart from being either regulated by the Financial Conduct Authority (our regulator, the FCA) or not, bridging loans also 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 and is usually a few months in duration while an open bridge is precisely that and 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 so they may look cheap, to begin with, but rates are somewhere between 0.4% per month up to 2%pm and as 2% of £100,000 is £2,000, once you’ve added in all the other moving costs associated with buying a house things can start to look a little scary if you’re not very careful.
It may be best to look for a broker in cases where money is tight as 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 but 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.
Trouble is, you’re not usually left with many choices if you want to go ahead and buy that house you’ve got your heart set on.
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 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.