UK Bridging Loan Guide
The UK bridging loan industry has gone from strength to strength over the last few years, particularly in and around the M25 area, with more and more applicants in search of fast and flexible funding options in order to secure their dream property purchases.
Bridging finance itself is a short-term loan product intended to plug the financial gap between the purchase of a new property and the anticipated sale of currently owned real estate. It is also a useful funding option for those seeking to purchase a property at auction with the ambition of renovating or refurbishing before selling on at a profit.
If you are looking to buy a new home and you are still waiting for a buyer to show interest in your present dwelling then a bridging loan will enable you to make an offer, exchange contracts and complete the deal in the meantime.
How it Works
The best way to explain the mechanics of how bridging finance works is with a basic example.
Imagine a couple who were looking to buy a 2-bedroom house on the outskirts of London, with the seller expecting £450,000 on the provision that the sale went ahead and completed within 6 weeks. If the couple had just put their current dwelling place on the market at £250,000, with a £50,000 mortgage balance outstanding, they would obviously be unable to complete the deal within the allotted time frame and they would need to raise the full £450,000 at an unrealistic speed.
A bridging loan would provide these funds in the interim, at a time when no bank or building society would be willing to offer a mortgage or similar financing solution as a funding option. When the couple eventually sell their existing residence, they will have £200,000 equity to contribute towards the bridging loan amount, and would then be able to apply for a new mortgage that would settle the rest of the debt whilst funding the outstanding debt on their more recent property acquisition.
In this simple example, we have left out any early repayment charges on the couple’s existing mortgage and other expenses which would need to be accounted for such as conveyancing fees and stamp duty, although these will obviously need to be dealt with when taking out a bridging product in real life.
With the above information in mind, the bridging loan would be secured against the equity in the couple’s original home and the market value of the new house they are purchasing. Using both properties as collateral would provide the additional security necessary to satisfy the lender’s criteria.
What Are the Borrowing Terms?
A bridging loan is only intended to be a short-term funding solution. Therefore, most bridging products have terms ranging from 1 to 24 months, with the interest and fees usually rolled up and settled at the end of the borrowing period. The actual interest rates vary from one lender to the next, and the fees are also subject to variation, depending on your selected broker. Unlike a traditional mortgage product or secured homeowner loan, the interest on bridging products is charged on a monthly basis and the amount borrowed is paid in full at the end of the term without the need of monthly installments.
How to Get the Best Deal on Bridging Finance
Although it is possible to apply for a bridging loan directly from a principle lender, the majority of experts will tell you that it is often much wiser to use the services of an FCA regulated broker, such as UK Property Finance or BridgingLoans.co.uk. This will give you access to borrowing rates which are much more competitive and affordable than the rates you would typically be offered when applying directly with the actual lender.