If you’re considering using a bridging loan for the first time, you’ll probably have lots of questions. Before making a big decision about your finances and future plans, it’s important to have all the facts you need to make an informed decision.
That’s what our “Bridging Loans: Explained” guide is all about; providing you with the information you need to decide on your next step.
What are bridging loans?
Bridging loans are designed to “bridge the gap” between selling an old property and buying a new one. With your finances tied up in a property which is going through the (often lengthy) process of being sold, it can be difficult to access the money you need to cover the cost of purchasing a new property. When you need to move fast, bridging loans make it possible to access the finance you need, before it is released from another property.
Who uses bridging loans?
From individuals who are moving home and need to act quickly, to house-flippers and buyers picking up property at auction, bridging loan customers vary. They do have one common trait, however; the need to access finance swiftly to secure the property they want.
What are the benefits of bridging loans?
These easy-to-access financial products are ideal for borrowers who need finance fast. When time is of the essence and your dream property is on the line, while your money is tied up in your old property, bridging loans ensure you do not “miss the boat”, removing much of the stress and uncertainty from the tricky cycle of selling and buying.
Bridging loans are also very useful for non-residential buyers. As a way to source auction finance for those who make their living through property, bridging loans present a speedy way to pounce on promising properties when the time is ripe. For those seeking short-term business loans, bridging loans may also offer a way to move on to greener pastures and keep enterprises ticking over while loose ends are tied up at old premises.
What are the risks of using bridging loans?
There are a few risks to be aware of when choosing bridging finance. Like most short-term finance options, interest rates are often relatively high and admin fees are typically applied. It’s important that anyone using a bridging loan is aware of all of the charges and the level of interest they will be expected to pay, on top of their actual loan amount, before proceeding.
At Just Mortgage Brokers, we have worked hard to earn authorisation from the FCA (Financial Conduct Authority), but not all lenders are as trustworthy. With a range of lenders offering bridging finance, including one-man bands and unregulated outfits, it’s essential you ensure any provider you borrow from is regulated by the FCA to protect your finances.
It’s also important to know exactly how you will repay your bridging loan. Missed payments on short-term financial products can quickly spiral into penalty fees and rising repayments. Having a concrete idea of precisely when and how you will be able to repay, and agreeing to realistic terms, will protect you from the potential risk of growing debt which, in very serious cases, can result in you losing your property.
Bridging loans & mortgages
Many borrowers now take on bridging loans to cover the cost of purchasing a property over the short term, with a view to later arranging a mortgage. Mortgages can take time to arrange and mainstream banks have been especially slow to lend in recent years. When you need to purchase property quickly, bridging loans can provide the funds to do so while the “nitty gritty” is ironed out with your future mortgage provider.
However, while the majority of borrowers are able to successfully purchase property with a bridging loan, then make the switch to a mortgage, there are risks involved in “banking” on mortgage approval. If you use bridging finance to purchase a property, intending to later mortgage it, there is a risk that your mortgage may not be approved. This will leave you with a substantial, high-interest, short-term bridging loan and you’ll probably be without the finance to repay it. For this reason, it is essential that you only use bridging finance for this purpose if you are 100% certain of receiving mortgage approval.
Do you have more questions about bridging finance? Our expert team are always happy to offer no-obligation advice. Contact Just Mortgage Brokers today with your query.