Bridge the Home
By Jo Phillips
Introducing: The Loan Giving Fast Finance To Property Buyers. As the name suggests, bridging loans can be a great way to bridge the gap between two financial transactions. Let’s say you’re in the process of acquiring a new house and you’re yet to find a suitable buyer for your current one. You can rely on bridging loans to finance the new purchase while waiting for a sale on your current one.
For many property buyers, bridging loans have become a quick-fix solution to their financing needs. This article delves into how bridging loans can become a quick financing solution for you if you’re a property buyer.
The Various Types of Bridging Loans
If you’ve been in the property business for a while, you may be familiar with its fluidity. Having access to readily available financing like bridging loans is crucial to avoid the impact of unforeseen circumstances. Bridge loans, also known as bridge finance, come in various types. Each has its unique features, pros, and cons. Some of the common options include:
Closed and Open Bridging Loans
A bridging loan can either be closed or open. The main difference between closed and open bridging loans is the repayment structure. Open bridging finance doesn’t have a predetermined end date, so you’re servicing the debt’s interest payments every month. Closed bridging finance means you have a date fixed for repaying the loan at the end of its term. As such closed bridging finance tends to have its interest rolled up into the gross loan so there are no monthly repayments – ideal for cash-strapped borrowers who are certain of their exit strategy.
As a property buyer, you need to know your repayment options before applying for a closed bridging loan as defaulting on such a loan can lead you to pay significantly more than the original loan amount – or worse, lose the property upon which the loan is secured.
Unlike closed bridging loans, open bridging loans may not have specific dates. Rather, lenders require borrowers to show proof of a reliable payment strategy that enables them to repay their loan. Open bridging loans are rare in the UK as they will require significant affordability checks linked to income. The primary reason borrowers seek a bridging loan is that they require fast finance, so open bridges take longer and thus aren’t typically appropriate to the situation in hand.
First And Second Charge Bridging Loans
First and second charge bridging loans make up another attribute of bridging loans. Charges are the method lenders will use to ensure that should a borrower default on their loan obligations, all the capital and interest of the lender is safeguarded. This safeguarding involves lenders securing a charge against your asset. As a property owner, bridging loans, taken as a second or third charge, can be more useful if already have a first charge mortgage. The charge hierarchy will determine the order of any repayments should you default on any of the loans. Lenders who have the first charge will be paid back first, followed by lenders with a second charge followed by lenders with a third charge.
The more junior the charge of debt, the higher the risk to that lender issuing it. As such, the more junior debts are typically charged a higher interest rate.
Bridging Loan Charges
Many finance providers offer bridging loans to property buyers on a fixed-term basis with repayment of the loan capital and the interest at the end of that term. This makes it more financially convenient than traditional mortgages, which are much longer-term and have monthly repayment arrangements. Bridging loans, whilst they have a higher interest rate than traditional mortgages, are fast to implement and many require no interim monthly repayments so effectively are useful for a short time when the borrower knows exactly how they will repay the loan at the end of the term.
Bridging Loan Borrowing
One key difference between first charge and second charge loans is that you are likely to be able to borrow more with the former than the latter. This makes first charge bridging loans more attractive to property buyers.
Other Alternatives
Homeowners who want to avoid the stress of selling their current houses to refinance a new purchase can try the let-to-buy alternative. It involves remortgaging your current property and using the freed-up equity to get a newer option.
Generally, bridging loans give almost immediate finance to property buyers. What’s better is the flexibility associated with the various bridging loan types.
