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Errol from Mortgage Broker Services is back – this time he is breaking down the complexities of bridging loans.
What is a Bridging loan?
Bridging Loans can be quite a complex subject. They really are a type of mortgage, or secured loan that offers a short term lending solution for customers who need to facilitate a deal very quickly.
Can anyone get a Bridging loan?
It’s a secured loan, meaning that the loan is secured against the property. Therefore, Bridging Loans are essentially for property owners or anyone wanting to buy a property.
What can Bridging loans be used for?
Bridging Loans can be used for many things, and a common use is to buy property at auction. This is where it’s essential to have quick access to the funds required to make the purchase.
They are also very popular with property developers, who can use Bridging Loans to purchase dilapidated property that’s in need of renovation work. Conventional Mortgage Lenders may deem a property to be unmortgageable if the property is inhabitable or unable to be lived in straight away. This may simply be because there’s no working kitchen or bathroom.
Bridging Loans can be used to solve short term business cash flow problems. Or in many cases, to avoid breaking a property chain transaction. This prevents buyers from having to walk away from their dream home purchase just because the sale of their current home has fallen through.
How does a Bridging loan work?
As Bridging Loans are a type of mortgage, you’ll need to have a deposit if you’re using it to buy property, or sufficient equity, if you’re raising funds from a property that you already own.
Most lenders will also require you to be able to afford to cover the monthly interest repayments. The majority of Bridging Loans will have the ability to roll up the interest. This is where the interest you are going to accumulate each month is added up and paid on top of your deposit, at the beginning of the loan period.
If you pay back the Bridging Loan early, the lender will return any unused rolled up monthly interest repayments.
Can you have a fixed or variable rate with a Bridging loan?
Rates are usually fixed for the duration of the loan term. This can range from anywhere between one to eighteen months, although it is also possible to have a variable rate. Rolled up repayments will always be fixed, but some lenders allow you to repay the interest throughout the duration of the loan, which may be at a monthly variable rate.
In order to make monthly interest repayments, however, affordability will be a major factor. You will need to demonstrate that you have sufficient income to cover the monthly Bridging Loan repayments alongside any other credit commitments, including the residential mortgage.
Are there any other costs involved besides the deposit and rolled up interest payments?
There will usually be a lender’s arrangement fee to pay, which is usually around 1-2% of the amount you’re borrowing. This fee will also be payable upfront or deducted from the net load. There will also be valuation and solicitor fees to pay as well.
How long does it take to arrange a Bridging Loan?
One of the attractive aspects of Bridging Loans is the ability to access the required funds very quickly. Whereas a conventional mortgage application takes, on average, around two to three months to complete, a Bridging Loan can take as little as one to two weeks to complete.
What are First Charge and Second Charge Bridging Loans?
When you buy a property with Bridging Finance, the Bridging Lender will always take a First Charge on the purchase property. If you’re raising capital by remortgaging a property that you already own and already have a mortgage with a First Charge lender in place, the Bridging Lender will then be forced to take a Second Charge on the remortgage property.
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What is the Exit Strategy?
Bridging Loans provide convenient, fast access to a short term injection of cash. However, they can be quite costly when compared to a conventional mortgage. Therefore, the usual plan is to repay the Bridging Loan as quickly as possible.
The Exit Strategy is the method you intend to use to repay the Bridging loan before or at the end of its term. It’s an integral part of a Bridging Loan application and no Bridging Loan will be approved without a viable exit strategy in place.
Some examples of viable Exit Strategies; Remortgaging away from the Bridging Lender is an acceptable exit strategy, which is usually used if you plan to keep the property. In this scenario, you’ll need to obtain a mortgage agreement or Decision in Principle from a conventional mortgage lender. This will provide evidence of the viability of this strategy.
Selling the property
Selling the property is also an acceptable exit strategy. This strategy can be used if you are carrying out renovations to add value to the property, or if the sale of a property that you already own has fallen through and you require some of the proposed sale funds while you’re looking for a new buyer. The Bridging Lender will need to be satisfied with the saleability of your property, and if renovations are being done, the proposed uplift on the future resale value.
The current and future values will be determined by the surveyor carrying out the initial valuation survey. If any renovation works to add value to the property, require planning permission, this will also need to be in place at the time of the application for the loan to be approved.
Other strategies include providing proof of access to an amount of legal funds. However, these funds must be accessible before the end of the Bridging loan term.
Can you get a Bridging loan with bad credit?
Credit will not be an issue with some Bridging loan applications. Although it depends upon the Loan to Value amount and how you eventually intend to repay the Bridging Loan. If, for example, you plan to repay the loan by Remortgaging with a conventional Mortgage Lender, then having very bad credit could make that impossible.
Are there any alternatives to Bridging Loans?
The alternatives are conventional mortgages, standard secured loans or second charge lenders. However, these alternatives are only available for properties that are in a mortgageable, liveable condition. They will also take a lot longer to organise.
How do you go about applying for a Bridging Loan?
Get in touch with us, here at Mortgage Broker Services. We have extensive knowledge of Bridging Loans and access to a wide range of products. Contact our office today on 0333 7721 551, or complete our 30 second contact form and one of our advisers will be in touch.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage. Some Bridging Finance is not regulated by the Financial Conduct Authority.