The most common reason a property purchase stalls is that you’re waiting for your existing residence to sell.
It’s extremely difficult to align dates perfectly and rare for transactions to complete simultaneously, causing pressure to proceed and avoid a break in the chain.
Another scenario is that a home has been purchased at auction, but you either don’t have the mortgage funds in place or face a last-minute dilemma when your full application is rejected.
In either of these situations, bridging finance broker may be an alternative to a mortgage – albeit a short-term solution – and ensure you don’t lose out on a dream property due to application technicalities.
Bridging Loans and Their Inner Workings
Essentially, the term ‘bridge’ refers to the bridge created between your need to access funding today and when you will be able to secure a longer-term, lower interest mortgage.
The key factor is that a bridge loan is very fast to organise.
Bridge loans are secured, usually against the property you buy, although you need to be conscious of the higher interest rates.
Most bridge lenders will offer a minimum of £50,000 and a ceiling as high as £10 million. Still, the maximum available depends on the equity in the property (or the deposit you’re putting down if it’s a new purchase).
Generally, the loan is limited to 75% of the property value. However, you can secure the finance against other assets such as buy to let properties if the current purchase doesn’t offer sufficient security.
Bridge Finance Pros and Cons
An accomplished broker will always ensure you know the pros and cons before proceeding with a bridge loan application.
Advantages of a Bridging Loan
- Completion is very fast and can keep a transaction on track.
- You can borrow significant values without a ceiling cap.
- A broker can negotiate repayment terms to coincide with your plans.
- Applicants can secure lending against a property that isn’t eligible for a standard mortgage.
Disadvantages of Bridging Finance
- The borrowing is secured, and you could potentially lose your asset if you cannot repay the bridging loan.
- Interest rates are higher in return for the convenience of a fast and flexible financing product.
- Additional fees can add to the total expense, so you should check these carefully.
Assessing the Interest Rates on Bridge Loans
As we’ve mentioned above, interest is higher on a bridge loan than a mortgage brokers, which you’d expect if you use an expedited financing method.
Bridge loans are short-term, so the interest is typically charged per day rather than per year. Depending on the circumstances, rates can be anything from 6% to 20% APR.
Although the charges are much steeper than a mortgage, it’s a viable option if you are waiting for mortgage approval, need to finance an investment to renovate a property, or can’t afford to wait for your mortgage to complete.
Bridging Loan Costs
Potential extra fees can be a deciding factor in selecting the optimal bridging loan and may include:
- Lender arrangement fees – often around 2% of the loan value.
- Upfront administration charges.
- Legal costs – paid to your solicitor as per a normal mortgage application.
- Valuation charges, on average, £900 to £2,000 depending on multiple variables.
- Brokerage fees are usually payable when the loan offer is confirmed.
It is important to consult an independent broker before picking a bridge loan product because an in-depth analysis of these comparable costs can mean that an option that looks cheapest in terms of interest is, in fact, the most expensive!
Expert Guidance Through the Bridge Loan Application Process
Most applicants apply either to a specialist broker or directly to a lender – although the latter is usually only possible if you have worked with the bridge loan provider before or fall into a specific client category.
Lenders will need at least one property to use as security, and the vital factor is your exit strategy, showing how you intend to repay or refinance the loan at the term-end.
Exit plans can include using a conventional mortgage to pay the loan back, with the bridge giving you sufficient time to complete your deal while you await final approval.
Other options could include selling the property, which is more common if you have purchased a residence that isn’t eligible for a mortgage due to its condition and intend to renovate and then sell the home for a profit.
If you would like independent advice about whether a bridge loan is the right financing product for you or discuss comparable quotes to ensure you are getting the best bridging rate possible, please get in touch.
Revolution Finance Brokers are available on 0330 304 3040 or via email at [email protected] and provide a wealth of expertise as capable brokers with comprehensive knowledge of the bridging loan market.