Bridge loans are a short-term financing option often used to bridge the gap between when you need to pay for something while waiting for your funds to become available. In the real estate industry, these loans are usually used by people who want to purchase a property but are waiting for another property to sell. Rapid bridging loans are considered secured loans, meaning you need a high-value asset in order to qualify. An example would be land or property.
What are Bridging Loans Used For?
There are numerous scenarios where bridging financing makes sense. A few examples include: -Business ventures -Buying property -Buy-to-let investments -Property development -Divorce settlements -Tax bill payment These type of loans can ideally be used by property developers in auctions. That’s because they usually need to pay a deposit in order to secure their purchase at short notice. Bridging loans have also become popular with property developers and landlords who need to fund projects on properties that they intend to sell off fast down the line. Moving homeowners have also not be left behind in viewing bridge loans as a viable means to fund their move.
The Different Types of Bridge Loans
Generally, there are 2 types of bridging loans; open and closed bridge loans.
1. Open Bridging Loans
These are termed open as they have no definite end date. They can be repaid whenever you get the funds. They usually up to 12 months, and sometimes longer.
2. Closed Bridge Loans
These, on the other hand, as the name suggests, have a definite end date. The end date is often base on when you will know you have funds available to pay back. Closed bridge loans often last a few weeks or months. As expected, open bridge loans tend to have higher rates compared to their counterpart as they are more flexible. Regardless of the type you settle for, an exit route or a way to repay is essential.
Tips for Choosing the Right Bridging Finance
Before you embark on securing a bridging loan, there are few things that you may want to keep in mind: The amount to borrow- You will get lenders offering anywhere between £5,000 up to £10 million and beyond. As such, you want to know exactly how much you need to borrow. Keep in mind that you have to pay after a certain period, so, don’t take more than what you need.
Your property’s worth
This is important as it will affect how much you can borrow as well as the interest rates.
How long you need to borrow for
Bridge loans can be as short as 4 weeks and as long as 24 months.
Whether you have a mortgage on your house
This will have an impact on how much can get through bridge financing. Also, it affects if you can look at first or second charge loans. When you apply for a bridge loan, the lender will add a ”charge” for the asset you are using as security. This charge sets the priority of debts if you are unable to repay the loan. If your house was sold in order to cover outstanding loans, a first charge loan needs to be cleared before a second loan charge can be repaid.
First charge loans, as the term implies are loans whereby they are secured against your property. An example is a mortgage. However, if you do not have a mortgage, a different type of loan such as a bridging loan can be the first charge loan.
Second charge loans, on the other hand, are whereby you already have a mortgage or loan against the house.