Bridging loans have become a popular method of borrowing for many people in the UK, particularly in the London area. If you need to borrow money for just about anything, you should really look into this option. These loans have helped many people to get the funds they required within a very short amount of time. While there are lots of loan options that are available to the average person, not all of them are quite as ideal as this one.
What are Bridging Loans?
If you are trying to purchase property before you sell your own home, a bridging loan could be helpful. These are essentially just short-term loans that people take out when they are in a desperate financial situation. Those who want to sell their home quickly after completing renovation work on it will also want to look into these loans.
Advantages of Bridging Loans
There are many advantages associated with bridging loans that you should be aware of before making a decision.
• Purchase property right away: With the help of a bridging loan, you can get the property you want before you even sell your current home.
• Better price: A bridging loan can also help you get more for your home when you are selling it, as you won’t be forced to sell it as soon as possible.
• Pay only one mortgage: When you take out this type of loan, you won’t have to make any payments until you sell your current home. This means that you’ll only have the one mortgage to cover.
• Low interest rates: Today there are many bridging loan options that you can take advantage of to get a fair rate.
• Minimal fees: There aren’t any discharge fees or break costs that come with getting a bridging loan, making them easier to pay off on time.
• No need to rent: If you’d rather not to have to rent a place and move again, a bridging loan is a good option to consider.
Drawbacks of Bridging Loans
There are some drawbacks associated with bridging loans, including:
• Compounded interest: Because interested is compounded on a monthly basis, you could end up spending quite a lot depending on how long it takes to sell your home.
• Valuation costs: If you decide to get a bridging loan, you will have to pay for two different valuations—one for your current home and another for your new one.
• Potentially high interest rate: If you don’t sell your property fast enough, you could end up with quite a high interest rate. You will need to know what the bridging period is so you know exactly how much time you have to sell.
Types of Bridging Loans
There are two different types of bridging loans—opened and closed. You will need to understand the difference between these two kinds of loans before you can make a decision on one.
Closed bridging loans are where you set a date that your property must be sold by, and the loan itself must be settled by then as well. These loans are somewhat risky, so you should be fairly confident that you can sell your home by the agreed upon date.
Open bridging loans are ideal for those who have found the property they want to buy but have not yet listed their own home on the market. These loans are far less risky, simply because only people who have exchanged on the sale of their current home can get them. It is highly recommended that you have a decent amount of equity in your home in the event that the sale does not go through.
You will be required to have a minimum of 20% of the total debt amount to purchase the new property you want with this type of financing. You do have the option of applying for a deposit bond, which is essentially an insurance company’s guarantee that the purchase will be completed. It is important that you apply for a deposit bond right after getting approval from your lender.
Deposit bonds cost just over 1% of the total deposit amount. You should make a point of using an online deposit bond calculator to get the details you need before making a decision.
Bridging Loans for Construction Expenses
A majority of lenders will be very reluctant to approve bridging loans for the purpose of building properties. You might be able to get one of these loans if you can convince the lender that construction will be done within six months. You will need to make repayments for the new loan and existing mortgage, but you’ll have a year to pay it all off.
If you have decided to apply for a bridging loan, it’s important to avoid overestimating how much you will get for your current property. Those who make this mistake usually find that they don’t have quite enough to pay back the loan they have taken out. You can capitalise on your repayments, but you’ll need to satisfy the loan-to-value ratio requirements of your lender.
Should I get a Bridging Loan?
A lot of people can benefit from bridging loans, but it is important that you consider your financial situation before moving forward. You also need to think about how much you can realistically get for your home, and when you expect to sell it. The last thing you want to do is to take out a bridging loan without carefully considering all of these factors.
Those who take out a bridging loan should ideally have a minimum of 50% equity in their current home. Also, remember that it can take a while to sell a house. Sometimes it can take a couple of months to settle everything, so keep this in mind. You shouldn’t rush into getting this type of loan, because it can leave you with some fairly large debt if you can’t pay it back.