> Bridging Loan - UK Guide
In a nutshell
A bridging loan is most often used to cover temporary financial problems during property purchases. It's often described as a short-term mortgage.
Best Loan for
People that are buying a new home but have not yet sold their old one and that need short term finance to allow them to go ahead. Bridging loans can also be used by the business community. Some people use bridging loans to cover large and unexpected expenses.
Loan amounts will vary depending on your own needs, income and on the lender you choose. As most bridging loans involve securing either the full purchase of an additional property or giving you sufficient finance to make up the sums you need, they are usually of relatively high value. Each individual lender will have a minimum loan figure and a maximum one. Many bridging loan specialists will not provide the full value of your property and may cap their loan at up to 70% of its worth. But it is possible to find 100% finance here.
Bridging loans are generally used as short term products so can be taken out for as little as a week. It's unlikely that you'd take one out for more than six months or so and many lenders will require repayment within 12 months. You can negotiate deals for longer periods if you wish.
If you're about to buy a new home and sell your old one then you may run into financial difficulties if the buyer of your old home pulls out and leaves you high and dry. You may lose your new property if you wait to find and organise another buyer - but a bridging loan can be arranged quickly and will allow you to go ahead with the purchase anyway. So, you'll be able to buy your new home before you sell your old one. In certain cases, you'll also be able to pay back your bridging loan at the end of its term rather than monthly, so you won't have to worry about finding the cash for extra monthly payments.
What to look out for
The main disadvantage with a bridging loan is that it will generally be charged at much higher rates than other types of property loans. You may find that your lender charges monthly interest rates rather than annual ones - so the longer you need the bridging loan, the more you'll have to pay. Rates will generally be charged at a few percent above base rate so have none of the advantages of general mortgage loans. You may also have to pay additional management fees to secure the loan in the first place. Some bridging loans will require regular monthly payments in much the same way as your existing mortgage. This will give you an extra set of payments at significantly higher rates to meet as well as your existing mortgage repayments. So, if you take this option, it's vital to try and make sure that you can afford to juggle both sets of payments while you need to bridging loan to avoid getting into financial difficulties. If you take out a loan that lets you pay at a specific point then you'll pay the capital and interest off all at once at the end of the loan period. This may well eat into any profits you have made on the sale of your original home. And, if you don't manage to sell your home by this point you may find yourself liable to pay the loan back anyway - if you can't come to some arrangement with your lender then you might have to sell your new home to find the money. If you do sell your old property sooner than expected then you may want to repay the bridging loan early - chances are you'll be charged high penalty payments to do this so you need to read the terms and conditions carefully. You'll probably have to secure your bridging loan on either your old or new property. So, as with any secured loan, you can get into serious problems with your lender if you fail to pay and they have every legal right to have your home repossessed if this happens.
Unfortunately few loan products can move quickly enough to compete with a bridging loan.