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How To Organise A Bridging Loan?

Property Saviour » Mortgages » How To Organise A Bridging Loan?

If you’re having difficulty buying a property, a bridging loan could be the ideal solution for your needs. But many people have no idea what it is. Bridging loans, however, have become increasingly popular – particularly with those looking to buy an investment property to rent out or renovate and let out.

The value of this market has grown by more than 23%, despite the COVID-19 pandemic’s effect on the market as a whole.

The most common reason for taking out a bridging loan is to buy an investment property, with 25% of borrowers reporting this as their purpose. If you think a bridging loan could be the way to finance your needs, there are a few things you should understand first.

Table of Contents

How Does A Bridge Loan Work?

Bridging loans are short-term finance products that come from both traditional and non-traditional mortgage lenders. They are designed to bridge the gaps in funding that often occur during the purchase and sale of property.

Such loans can come with a variety of terms to meet individual needs but are usually no longer than a year. However, if the loan is secured against other investments, the terms can be extended up to two years.

It is also possible to take out a loan against a primary residence, although this can be risky if the investment goes bad as you could lose your home. Therefore, you may prefer a shorter-term loan.

Are Bridging Loans Regulated?

Bridging loans are regulated by the Financial Conduct Authority (FCA) in some cases, but many people opt for unregulated loans to gain access to capital.

If you are taking out a loan for your home, the home of someone close to you, or to finance a property you are living in, it is best to get a regulated loan as it provides consumer protection from the FCA.

The lender must meet certain standards and regulations before they can offer the loan. They will explain the costs and risks associated with the loan in a clear and easy-to-understand way, and perform thorough checks to ensure that the loan is suitable and affordable for you.

With a regulated bridging loan, you have some protection should you be mis-sold the loan or given bad advice, and may be eligible for compensation from the Property Ombudsman scheme.

On the other hand, if you are taking out a loan for an investment property, an unregulated bridging loan may be the better choice as you do not need the FCA regulations.

Unregulated loans have fewer restrictions and checks, and you can get a longer term on the loan of up to two years in some cases.

Unregulated lenders are not completely unregulated, though; there are industry regulation groups such as the Association of Short-Term Lenders (ASTL), the Financial Intermediary and Broker Association (FIB), and the National Association of Commercial Finance Brokers (NACFB) that help regulate this type of lending.

Unregulated lenders often join these groups to show investors that they are a safe bet. They must follow certain conduct codes set by the organization, such as displaying fees upfront and responding to customer complaints quickly.

The main difference between regulated and unregulated products is the level of protection and the number of checks you must go through.

With regulated bridging loans, you will have to go through more checks than with unregulated loans, which tends to be a faster process. For either type of loan, the lender will check your finances and want to know how you intend to repay the loan.

Keep in mind that bridging loans can be expensive, so plan your exit strategy before applying for the loan.

How To Organise A Bridging Loan
Such loans can come with a variety of terms to meet individual needs but are usually no longer than a year.

Why Use A Bridging Loan At All?

A bridging loan can be a useful option for many different circumstances. They are particularly popular with landlords, property developers, and sometimes individuals who are changing homes. They can also be used by businesses looking to purchase property.

So, how does a bridging loan work? Essentially, it is a type of loan that acts as a bridge between one situation and the next.

For example, if you wish to buy an investment property at auction, renovate it, and then sell it for a profit, you can use a bridging loan to purchase the house, then obtain a mortgage and later sell it once the work is complete.

Additionally, bridging loans can be used for other reasons, such as if you have found your dream home and agreed on a completion date, but you are having difficulty selling your current home. In this instance, a bridging loan can help you purchase the new property.

They can also be used for renovating a property that you plan to live in and may not be able to obtain a mortgage until the work is done. You may also need a bridging loan if you are buying a property at auction to live in and the mortgage paperwork is taking longer than expected.

Bridging loans are subject to various conditions and, therefore, do not qualify as proof of funds.

The Advantages Of A Bridging Loans For Houses

If you’re not sure if a mortgage bridging loan is the right choice for you, it’s important to consider its advantages. One of the biggest perks is its flexibility.

Lenders have more freedom when it comes to these loans compared to other traditional mortgage products, which can significantly increase your chances of getting approved.

In addition, these loans can be arranged quickly – often within a week of applying. This is much faster than a traditional mortgage loan, which can take a month to be organised.

Bridging loans also allow you to borrow a large sum of money, which can help with the financial strain of buying a property.

They are also available for non-standard properties, which means even if you can’t get a loan because of features like thatching, you may still be able to arrange financing through a bridging loan.

They’re Not Always The Right Choice For A Loan To Buy A House

The advantages of bridging loans for house purchases come with a few drawbacks. Chief among these is the fees you’ll incur, which can make borrowing this way more costly. Plus, it’s a secured loan, so if you can’t make your payments, you may end up forfeiting assets.

Furthermore, bridging loans typically come with higher interest rates, making them more expensive than traditional loans in the long run.

How do I qualify for a bridging loan UK
Even if you have a bad credit score, don't worry - many lenders take into account the security you offer and your exit plan.

Understanding Your Eligibility

Knowing if you are eligible for a bridging finance deal is essential if you’re looking into this type of loan. What criteria do you need to consider when it comes to bridge financing? Every lender has different criteria.

However, in most cases, they’ll assess your risk based on the amount of the deposit you’re putting forward, the location of the property, the size of the loan, your exit strategy for repayment, and your credit history.

It’s important to note that bridging loans are considered secured loans, so you will need to provide both a deposit and some sort of asset when you apply for the loan. Usually, you will need to use another property as collateral, so if you’re unable to repay the loan, the lender can repossess it.

It is important to have an exit strategy in place before you approach the lender. There are several options – selling the property to pay off the loan, refinancing the loan, flipping the property, or using future funds from an investment.

The deposit size matters when it comes to property bridging loans. Most lenders will require a deposit of at least 25%, however, the bigger the deposit, the more likely you are to receive the loan you need. You’ll get the best interest rates and terms with a deposit of around 40%.

You will need to provide evidence of income to obtain a bridging loan for a property, so if you’re self-employed, you might need to talk to your accountant to get the necessary information.

Additionally, you can expect a credit check when you apply for a bridging loan for a house, and the better your credit history, the more likely you are to get the loan you want.

Even if you have a bad credit score, don’t worry – many lenders take into account the security you offer and your exit plan.

If you have a county court judgment, a default, a repossession, or a declared bankruptcy on your record, you may still be able to get this type of loan.

Know The Available Bridging Loan Types

If you’re considering a bridging loan, it’s useful to understand the two types available: open and closed. Closed bridging loans have

a set repayment date and, if paid off early, usually come with early repayment fees. These are often used when there is a concrete exit strategy and interest rates can be lower. They are ideal if you just want a loan to cover the gap between properties.

Open bridging loans typically have a maximum term of six to twelve months, allowing for repayment at any point within that period. These are ideal for when you’re not sure when you’ll be able to execute the exit strategy.

An example would be if you’ve bought a property to renovate using a bridging loan, but you don’t know how long the renovations will take or when you’ll find a buyer. Interest rates may be higher, but you’re given the flexibility you need when it comes to repayment.

Understanding First and Second Charge Bridging Loans

Bridging loans are secured loans, so a charge is usually placed on your property when you borrow this type of finance.

This charge is a legal agreement, which sets out the order in which lenders are repaid if you are unable to repay the loan.

If the property you’ve taken the bridging loan against is newly acquired, it is known as a first-charge bridging loan. This means that the lender will be the first to receive repayments from the sale of the property.

On the other hand, if you have an existing mortgage on the property (in the case of a property chain situation, where a bridging loan is taken out to make things simpler), you will be taking out a second-charge bridging loan. In this instance, the original mortgage lender will be paid off first.

Second-charge bridging loans tend to have less favourable terms than first-charge loans.

What do I need to get a bridging loan UK
Generally, lenders offer up to 75% of the value of the property being purchased.

The Amount you can Borrow

Have you been wondering how much you’d be able to borrow with a bridging loan? It all depends on the lender and the property you’re looking to purchase. The minimum loan amount is usually £10,000, but for larger developments, you could obtain much more.

Generally, lenders offer up to 75% of the value of the property being purchased. For example, if you’re purchasing a £100,000 home, you could borrow up to £75,000. Some unregulated bridging loans may even offer higher values and lower deposit amounts.

The Cost of Bridging Loans

A bridging loan can be expensive. It depends on how much you borrow, but you should know that these loans come with high-interest rates.

As with any property loan, you’ll need to pay arrangement fees, valuation fees, and other fees. You might also have to pay exit fees if you decide to pay it off early.

Remember that most bridging loans are interest-only. This means you’ll only have to pay the interest every month, and not the principal until the end of the loan term. There are three ways to pay the interest.

The first is with monthly payments, similar to a traditional interest-only mortgage loan. You can also pay deferred interest, also known as “rolled up” interest, which means you won’t make any monthly payments until the end of the loan term.

Lastly, with retained interest, the lender will tell you the total interest charges on the loan, and add it to the loan amount. For example, if you borrow £100,000, the lender may calculate that you’ll pay £10,000 in interest, so you’ll borrow £110,000 and repay it all at the end of the loan.

How Do I Actually Get a Bridging Loan?

If a bridging loan is the right financial product for you, you may approach a lender directly or go through a broker.

A broker may be able to provide more support throughout the process and help you determine which product is the best fit for you when applying. They may also be able to direct you to the right lender.

If you are unsure if a bridging loan is the best option, it is recommended to speak to a financial expert to better understand when a bridging loan is the right option and when an alternative mortgage product might be more appropriate.

A bridging loan is not suitable for every situation, and it may not be the most suitable product for you. Nonetheless, it may be the perfect solution for some, so it is worth having a conversation with a lender to see if it can meet your needs.

In many cases, getting a bridging loan is no more or less complicated than obtaining loans of other types, and with just one conversation you could be on your way to owning a house you wanted to buy at an auction or in a regular sale, much sooner than if you used other traditional financing methods.

To get a bridging loan, it is necessary to speak with a lender who can help you make the right decision.

If you are unsure if traditional financing is the right route to take for your next home or investment property, it is worth looking into the possibility of a bridging loan to meet your needs.

Many people have used this type of loan successfully and it could be perfect for you too.

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