The Beginner’s Guide to Bridging Finance

The Beginner’s Guide to Bridging Finance
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The Beginner’s Guide to Bridging Finance
The Beginner’s Guide to Bridging Finance
'; 03333218206Bridging loans are essentially short term finance products use to purchase land or property for residential or business use. A bridging loan is a product that is also flexible in criteria, therefore borrowers may find bridging loans useful for the ability to buy properties fast, or to buy uninhabitable properties that need significant renovation costs spending on them, bridging loans are widely available to first time buyers and first time property developers.
Bridging loans are a useful form of finance for your mortgage, and at Mortgage Lane, we’re here to help you get the best deal with them. This article will focus on everything about bridging finance: what a bridge loan is, when they’re useful, how much they cost, and how to apply.
What are Bridging Loans?
A bridging loan is also known as interim financing, gap financing, bridge or bridging finance. It’s a type of short-term financial loan used until the debtor is able to secure permanent financing or remove any existing obligations which are causing the need for the loan.
Bridging loans are most commonly used for property and in real estate, but are also present for businesses looking to leverage some short-term funds. They provide instant cash flow, but often have high interest rates which could result in greater overall expense, leading to them often being short term. They are also usually back by collateral such as your old home, another property, or your business’ inventory.
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First and Second Charge Bridge Loans
There are two different kinds of bridge loans. These include first and second charge bridging loans.
- First Charge Loans. This is where you own the asset you’re leveraging, with a secured loan with just one lender.
- Second Charge Loans. This is where you own a property with a mortgage or bridging loan already secured against it, but choose to take another bridging loan out on top of that, without repaying your existing lender.
First charge loans are generally the more desirable of the two, as they don’t require you to be making the additional mortgage payments on top of the interest of the loan itself and don’t require lender consent. Being eligible for a first charge loan also means you have more equity in your property, often making the terms of a loan more favourable.
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Open ended and Closed Bridging Loans
The length of your loan’s term and the agreed ending date also change its classification. There are two options based on the term:
- Open Loans. These don’t have a specific end date, but are usually expected to be repaid within a year. High interest rates may also encourage you to pay the loan sooner rather than later.
- Closed Loans. These have a fixed end date, which means you’ll need to have paid off the loan by the agreed upon time. This can help keep costs lower, but does mean you need to secure the reason behind the loan before time runs out.
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When is Bridging Finance Useful?
Bridging finance comes with a number of benefits to both homeowners and benefits. Some of the main advantages of a bridge loan include the quick application, approval, and funding processes, along with the immediate short-term cash flow it provides.
On the other hand, you might not want to take out a bridge loan if you’re looking for something a little longer term. The high interest rates and large fees of bridge loans can make them expensive, and if you’re also paying concurrent fees on multiple properties then the costs can quickly start to add up.
Bridge Loans for Homeowners
As is in their name, bridge loans help to “bridge the gap” when finance is needed but not available – such as when you’re trying to sell your house to fund a new one, but want to move as quickly as you can.
With a bridge loan, you can use the equity in your home as a down payment on a new one while you wait for it to sell. This gives you extra time to find a buyer and peace of mind that you can proceed with your purchase, but it is important to understand that the high interest rate (comparative to other loans) may make its own impact on your financial situation.
Bridge Loans for Businesses
When your business is waiting on their long-term finances, you’ll still need funding in the meantime. Bridging loans for businesses allow businesses to secure short-term funding to continue their operations while they wait for the longer-term funds to come through. Bridging loans can be used by operating businesses for access to capital and property investors looking to purchase land or property for speed, pre-planning, or for renovation purposes.
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Speak to an expert bridging loan broker from Mortgage Lane.
Our expert award winning advisors are on hand to help guide you through the bridging loan process.
How Much Does a Bridge Loan Cost?
The cost of a bridge loan can be broken down into several factors, including:
- Broker fee
- Valuation fee
- Lender fee
- Solicitor fee
- Exit fee
- Admin fee
- Interest payments
For example, you may need to pay a valuation fee to the lender when securing a loan against a property, as the lender may need one of these to get an accurate loan-to-value ratio and price their bridge loan accordingly.
The end of your loan’s term can also come with admin fees, such as when changing the name on the deed or processing any final parts of the property handover process.
On top of these factors, you will also need to pay the interest on the loan, which is often relatively high – anywhere from 6% to over 19%.
The actual cost of your loan will depend on a variety of factors like the lender’s rates, current interest rates, the value of the loan, and the repayment term. That’s why it’s important to really consider your situation and needs before you engage in any form of bridging finance.
How to Apply for a Bridge Loan
You can apply for a bridging loan using a broker, who will connect you with a lender that can offer you the best rates for your situation. You could also apply yourself, but a broker, like us at Mortgage Lane could offer excusive access to products and may speed up the process, takes out all the hassle, and generally results in a better deal.
The value of the bridge loan for a mortgage can be estimated by combining the mortgages of the two properties together. The value of the loan will typically only add up to 80% of the value of these two properties combined, meaning you will either need significant equity or cash reserves to keep up with the loan and make up for the difference.
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