What is a Bridging loan?
Fromask.com describes what is a bridging loan, as a short-term solution to help you cover the costs of a short-term problem. It allows you, for example, to buy a new flat if your current one is being refurbished or it might assist you in buying an investment property at auction which you can renovate and then sell again, thus making a profit. Given that they are much shorter-term solutions than normal mortgages (especially without equity), they are normally only given out by specialized mortgage lenders who also offer properties like conventional variable rate or fixed-rate interest-only mortgages, but some banks and building societies may also be able to help.
How does a bridging loan work?
A bridge loan can help you finance your new business by giving you the money you need until your other financing (or other sources of funding) become available. Bridge loans are also a good choice if your business is close to securing additional financing – but hasn’t secured the money yet. We have different types of loans from which to choose, including closed and open-ended loans, with terms ranging from three months up to five years.
Open bridging loan
You may prefer an open bridging loan over a closed one because of its flexibility. Closed loans have strict terms and conditions whereas you can pay off open ones whenever you want, provided you stay within the maximum term. Open bridging loans are also more expensive than their closed counterparts because they’re riskier to lenders and they need to be compensated appropriately if they decide not to take action on your loan. Even though open bridging loans are costly, however, they might be the better option if you’re unsure how much time some renovation work will take which is why we recommend consulting a professional like Tony Bame who has 20 years of experience managing various properties in Richmond.
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Closed bridging loan
Most commercial banks usually cite the fixed rate as their priority, so they go for a closed bridging loan over an open one. For example, they are expanding their business and need to finance large projects. They know if they will be banked by capital bank USA in the future. Therefore, interest rates are often lower so that there is little uncertainty over when funds will become available.
It’s also worth noting that many homeowners opt for a closed bridging loan since it gives them shorter completion times i.e. the amount of time between signing on the dotted line and moving into their new property – which is ideal for those who’d like to sell up or move away from their current property as soon as possible.
How much does a bridging loan cost?
These loans start at 4.75% and go up to 8.95%. Note that they carry an APR (annual percentage rate) of 10.5%, which is much higher than what you’ll pay for a mortgage or a payday loan, for example. One of the reasons for this increased cost is because these loans typically take place over a very short period (three months), so there’s not enough time to breathe and make payments during periods in which no interest is being charged, thereby increasing the overall cost of the loan. These include:
Where the monthly payments you make to the bank go towards reducing your loan. This is similar to an interest-only mortgage, where you only make the monthly interest payments and not more than that (What is a Bridging loan).
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Deferred or ‘rolled up’ interest
Deferred interest plans can make it a lot easier to pay off your balance instead of ending up in debt the way you do under normal credit arrangements. With deferred interest options, no interest is incurred on your purchases until the very end of the loan term, so with these plans, you may find you can make smaller and more manageable monthly payments. Despite this flexible benefit, these plans aren’t available from every lender, but if you’re able to take advantage of deferred interest in your next financing deal, it could help you enjoy more affordable payment terms, whether that means more savings or better flexibility (What is a Bridging loan).
Here, the lender considers what the interest charges will be throughout the whole period of the loan if it was calculated from day one, and they add that to what you need to borrow. For example, you might need £100,000 and the lender calculates that over a six-month term you’ll have paid interest charges amounting to £10,000 so to get the £100,000 you need and have full reign over your money again at the end of your loan repayment period, you’ll have to borrow £110,000 in total (What is a Bridging loan).
How to get a bridging loan
There are dozens of different lenders active in the UK who offer bridging loans, whether you’re looking for a short-term loan for your home or investment property. You might want to work with an independent mortgage adviser because some lenders only offer their products through such professionals and not directly to consumers but are aware that such advisors do charge a fee for their services. Some of these lenders ‒ particularly those who focus most of their efforts on short-term property loans like bridging loans ‒ only offer their products through independent mortgage advisers, so be sure to inquire about them as part of your research (What is a Bridging loan).
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Is a bridging loan secured?
You might be wondering what the heck is a bridging loan. Well, a bridging loan is a term for a secured loan because it uses something like a home or any other type of asset as collateral to borrow money when you can’t pay it back (What is a Bridging loan).
Pros of bridging loans
- Quick to arrange
- Borrow large sums
- Non-standard properties
Cons of bridging loans
- High interest
- Secured loan