Bridging Loans

For some applicants Bridging Loans present an ideal solution to specific scenario. Our experts have provided a detailed guide, which can help anyone new to the Bridging Loan concept better understand the unique workings behind this type of finance.

How are Bridging Loans used?

Bridging loans can often be a very useful tool in the home moving process, to provide short term borrowing to assist in the purchase of a new property and help stop a breakdown in a sales chain.

Moving house can be an incredibly stressful experience at the best of times. Even when things go smoothly there is a lot to contend with such as selling one house whilst buying another one, dealing with Solicitors, estate agents, vendors and purchasers, arranging a mortgage whilst trying to get everyone involved in the chain to agree to a single moving date and then to get the removals firm to agree to the same date!

Quite often there may be a chain of people moving, with several different transactions involved in the process at the same time. If anything goes wrong for anyone in this chain, it can have the effect of breaking the chain and delaying the whole process. It could even mean that someone could lose the sale of their existing house or the dream of their new home through no fault of their own.

Most people, particularly when moving to a more expensive property, rely on the equity which has been built up in their existing house to help fund the purchase of the new home and reduce the amount required on a mortgage. Indeed, this equity is often the only source of deposit and may form a significant percentage of the overall purchase price. If someone is downsizing their home, the equity could mean the difference between taking out a mortgage and owning the property outright.

If the sale of the old property should fall through or even be delayed for some reason, the equity would still remain locked into it and the necessary cash would not be available to complete the transaction on the new property. This is where bridging loans fit into the process.

Understanding how Bridging Loans work

So what exactly is a bridging loan and how does it work? Bridging loans are designed to provide short term funding when there is a delay in the sale (or re-mortgage) of a property. It quite literally “bridges” the gap between purchase and sale. A bridging loan is a straightforward loan which is secured on the equity available in the property to be sold, taking a second legal charge over the property where there is an existing mortgage, or a first legal charge where the property is unencumbered. The end result is to provide the necessary funds for the completion of the new purchase, even though the old property has not yet been sold.

Due to the nature of bridging loans, they are normally required when something has gone wrong in the chain, or funds are required quickly to complete a purchase and as such, bridging loans tend to be quick and easy to arrange. Certainly a bridging loan could be arranged in a much shorter time than a re-mortgage, for example, usually in a matter of a few days.

As bridging loans are secured on the equity locked in a property which is to be sold, they are considered to be a short term loan, usually with a maximum term of less than twelve months. Also, as they are likely to be paid off with a single lump sum payment, bridging loans are predominantly arranged on an interest only basis to reduce the monthly costs, although capital repayment options are available if required.

Open and Closed Bridging Loans

A bridging loan can take two basic forms: closed bridging and open bridging. Closed bridging is used where a definite date is known for repayment (for example, when a completion date for the sale of property has already been arranged) and therefore a fixed term can be applied to the loan. This term can be as short as one month. Open bridging, on the other hand, is where no completion date is known and therefore the loan itself is open ended. This creates a higher level of risk for the lender, as they do not know at outset when they will be repaid and as a result of this, open bridging loans are usually charged at a higher interest rate than closed bridging.

A borrower who is looking for a bridging loan should proceed with caution. Although bridging loans can be extremely beneficial and are only for a short time, the duration of the loan can be an expensive time, as the borrower not only has the bridging loan to pay each month, but also has the mortgage on the new property and very often, mortgage payments on the property to be sold.

How much can I borrow?

The amount which can be borrowed on a bridging loan is governed by a few factors: Firstly, the affordability to the borrower has to be considered. We have already mentioned that this can be an expensive time and a lender must ensure that a potential borrower has sufficient disposable income to fund the total amount of borrowing for the duration of the term. Secondly, the loan to value of the bridging loan against the secured property must also be considered. This amount can vary greatly from lender to lender and also on different types of bridging. Typically this amount would be in the region of 75% to 85% loan to value, although in certain circumstances (often where additional security is available) some lenders may release up to 100% of the value of the property. In other cases, this amount could be as little as 50% loan to value. Usually this would apply to commercial bridging, or where a borrower had a poor credit history. Finally, a lender would usually be prepared to lend more where closed bridging, rather than open bridging, is taking place, as a definite repayment date is known and therefore the risk is lowered.

Factors to bear in mind when applying for Bridging Loans

In most cases, when someone requires a bridging loan, they need it in a hurry. The desire to purchase their dream home can overrule logic and common sense and potential borrowers often rush into the first bridging deal they come across. There are many providers of bridging loans available in the market place today. These include independent companies who specialise in bridging finance, various centralised lenders such as mortgage and loan companies as well as the more traditional route of banks or building societies. Before committing to a particular option, it is worth seeking independent financial advice from a broker who has the ability to search the whole of the market for the best deal for an individual, as well as being able to advise on whether or not a bridging loan is actually the best route to take. As with any type of finance, bridging loans can work out being very expensive and a potential borrower should research the matter thoroughly, making themselves fully aware of all the necessary facts and the implications of entering into such an agreement, to ensure they get the best deal available for their own personal circumstances.