Why and when to use a Bridging Loan to achieve your property goals
20th January 2020
If you’re looking to take steps onto, or further up the property ladder, it’s always handy to know about the different kinds of finance that are available to support your next property purchase. There may be some circumstances where you’re put in a position of finding a property that ticks all your boxes, but a standard mortgage isn’t immediately appropriate or feasible, so alternative routes of financing are worth exploring to make sure you don’t miss out.
A bridging loan is a type of short-term property finance that can allow a property to be purchased while longer-term finance or the sale of another property is being arranged. Bridging loans are a specialist type of loan that can be expensive if not used correctly, but in the right circumstances, they can help you achieve your property investment or homeowning goals. The types of scenario that someone might use a bridging loan include:
- Buying a property that’s currently uninhabitable – and probably not mortgageable – until refurbishments have been completed
- Funding a property conversion or extension prior to re-mortgaging at its new value
- Borrowing money quickly to be able to buy as a chain-free buyer to help achieve a better purchase price
- Funding the purchase of auction property quickly without needing to wait for mortgage applications
- Divorce settlement or buying out a share of a jointly owned property
- Purchasing land to build on, allowing you time to obtain planning permission, or if planning permission is already in place, to erect the property
Typical Bridging Loan agreements
A typical bridging loan agreement will last no longer than 18 months and can be as short as 1 month. (unlike a mortgage agreement, which can be up to 40 years long!) The key difference between a bridging loan and other types of loans is that the fees and interest for borrowing the money are rolled into one amount, which is repayable in full at the end of the agreement, rather than through monthly payments. For example, a loan of £100,000 might attract interest of 1% per month and an arrangement fee of 2.5% over a term of 3 months. Nothing is repaid in month 1 or 2, but at the end of month 3, £105,606 will be repaid assuming interest is compounded and added monthly. Legal fees and valuation fees are also likely to be added on.
Bridging loan applications tend to be quicker than mortgage applications because the process is not as complicated. Some loans can be processed within 2-5 days, but the average time for a Bridging Loan application process is around14 days.
The borrowed amount can vary from as little as £50,000 to amounts in the multi-millions for professional developers.
For some buyers and investors, the excitement of finding a perfect property new to the market or a project in the auction room can be too tempting to resist, and with the knowledge that a bridging loan will probably help, they jump in with an offer and deal with the financing afterwards. This is risky because it puts a lot of urgency on the transaction and probably won’t allow time to really plan the finances properly in the long and short term, or to research the best available options. We’d, therefore, always suggest that if you’re thinking of buying a “fixer-upper” or auction property, to speak with an Independent Financial Adviser who will be able to give you some forecasts and highlight the risks to your cashflow. Knowing your budget and fees before you bid for a property will certainly help you stay in the black.
If planning permission is holding you back, our Property Services team is very experienced with assisting all manner and size of planning projects in the Sussex area. Please contact us for more advice and costs.
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