Prospect Tree Mortgages are experts in bridging loans and bridging finance. Whether you are considering bridging finance specifically or are interested in how it works, read on and find out more!
Your home may be repossessed if you do not keep up repayments on your mortgage
Bridging Loans
What is a bridging loan? A bridging loan (or ‘bridge loan’) can be useful if you need to borrow money for a short period. It can help to ‘bridge the gap’ if you want to buy a new home before selling your old one.
When you buy a property at auction, you will need access to money immediately, even if you haven’t sold your property yet. This is a great example of when a bridging loan will help.
There are two types of bridging loan: ‘closed’ and ‘open’
Closed bridging loans have a fixed repayment date. You would normally be given this kind of loan if you have exchanged contracts but are waiting for your property sale to complete.
Open bridging loans have no fixed repayment date. However, you will normally be expected to pay it off within one year
There are two types of bridging loan: closed and open.
Closed bridging loans have a fixed repayment date. You would normally be given this kind of loan if you have exchanged contracts but are waiting for your property sale to complete.
Open bridging loans loans have no fixed repayment date. However, you will normally be expected to pay it off within one year.
Whichever kind of loan you take out, the lender will want to see evidence of a clear repayment strategy, such as using equity from a property sale or taking out a mortgage.
They will also want to see evidence of the new property you are purchasing and the price you plan to pay for it, as well as proof of what you are doing to sell your current property if relevant. You should also have a back-up plan in place in case your repayment strategy fails.
When you take out a bridging loan a ‘charge’ will be placed on your property. This is a legal agreement that prioritises which lenders will be repaid first should you fail to repay your loans. Which route you take will depend on your own situation. However, our experts are here to help you figure this out.
When you take out a bridging loan a ‘charge’ will be placed on your property. This is a legal agreement that prioritises which lenders will be repaid first should you fail to repay your loans.
Both a first and second charge bridging loan take your property as security in case you default on repayments.
Typically, if you still have a mortgage on your property, the bridging loan will be a second charge loan, meaning that if you failed to meet repayments and your home was sold to pay off your debts, your mortgage would be paid off first.
But if you owned your property outright, or you were taking out a bridging loan to repay your mortgage in full, you would take out a first charge bridging loan. This means that the bridging loan would be repaid first if you fell behind with repayments.
Bridging loans are priced monthly, rather than annually, because people tend to take them out for a short period. One of the major downsides of a bridging loan is that they are quite expensive: you could face fees of between 0.5% and 1.5% per month. Bridging loans are more expensive than regular mortgages so you should take advice before starting the process.
Bridging loans are priced monthly, rather than annually, because people tend to take them out for a short period. One of the major downsides of a bridging loan is that they are quite expensive: you could face fees of between 0.5% and 1.5% per month.
That makes them much pricier than a normal residential mortgage. There are also set-up fees to consider, usually around 2% of the loan you want to take out, so it is advisable to only take a bridging loan out if you are confident that you will not need it for a long period of time.
In cash terms, bridging loan providers might lend anything between £25,000 and over £25m. But you will usually only be able to borrow a maximum loan-to-value ratio (LTV) of 75% of the value of your property.
If you are taking out a first charge loan, you will typically be able to borrow more than if you were taking out a second charge loan.
In cash terms, bridging loan providers might lend anything between £25,000 and over £25m. But you will usually only be able to borrow a maximum loan-to-value ratio (LTV) of 75% of the value of your property.
If you are taking out a first charge loan, you will typically be able to borrow more than if you were taking out a second charge loan
How long does it take?
Most people who require a bridging loan also need access to the funds relatively quickly. For example, you could have purchased a property at auction and typically will need to provide the funds within 28 days. For this reason, bridging finance can usually be secured within 3 to 4 weeks.
This varies on a case-by-case basis.
Case Study
Here is an example of how we’ve helped a client of ours achieve their property goals.Read on to find out more, or start your own journey today.
The Client
Our clients won a property at auction and paid a deposit to secure it. They had an outstanding mortgage on their existing home which was on the market but not sold.
The Challenge
The auction house accepted their bid and had taken a deposit from them. They were now required to pay the balance or they could lose their deposit and the property. As their current property was not sold they were unable to clear the mortgage on it and unable to secure a new one for the property they had just won at auction.
The Solution
Due to the time pressure from the auction house, and the lack of buyers on their current home, the best solution was to take out a bridging loan to get quick access to funds whilst they waited for a buyer on their exisiting property.
The Result
They were able to pay the balance to the mortgage house and start work renovating the property before they move in. This took pressure off the sale of their current property and will ensure that they can wait for the best buyer at the best price.
Review
I spoke to multiple mortgage advisors and had no luck… then I spoke to Graeme who was amazing. He took the time to listen to my situation, advise me on all my options and most of all, was honest. Will definitely be coming back. Thank you!
