A bridging loan is a short term funding option usually aimed at property buyers before they can secure long term finance.
This type of finance is to ‘bridge the gap’ between a buyer’s sale of their current home and completion of their next home or for an investor to buy a property at auction, before more traditional financing is in place.
Eligibility
Bridging loans are a niche product, usually only available from mortgage brokers and advisors. Similar to logbook loans, a bridging loan is also a type of secured loan.
As the loan is secured on the property, having a poor credit score will not usually prevent you from obtaining a bridging loan but the interest rate offered to you may be higher.
Bridging loan risks
If a buyer has taken out a bridging loan in order to move into a new property before selling their previous home, they now own 2 homes, one of which now has a high interest bridging loan, possibly placing them in a poor negotiating position when trying to sell their previous home.
If buying a property at auction, unless you have a mortgage offer in principle, then there is always the risk that traditional finance is not willing to lend on the property you have just purchased, leaving you in a precarious financial position with a bridging loan.
Buyer beware!
Interest rates and fees
Make sure you are clear on fees as there is usually an arrangement fee and an exit fee – Typically 1% on each.
On a £100,000 loan this would then add up to £2000.
Other fees to be aware of are valuation fees, legal fees, transfer fees, security release fees etc..
To carry the loan, interest rates typically start at 1% per month with a loan term of 1 month to 12 months.
Closed bridge and open bridge loan
A closed bridge loan has a fixed exit date for the loan while an open bridge loan has no set date for settling the loan, this gives the borrower greater flexibility but will have a higher rate of interest applied, as it carries more risk for the lender.
1st and 2nd charge loans
If you obtain a bridging loan to buy a new home but still have a mortgage on your current home, your mortgage will take priority as a first charge loan against your current home.
The bridging loan will be registered as a second charge loan on your current home, meaning it takes your current home as security, but your current mortgage lender will take priority for repayment should your home be repossessed.
If the bridging loan is used to pay off your original mortgage in full, then the bridging loan will be registered as a first charge loan.
The loan documents will state whether your bridging loan is a first charge loan or a second charge loan, and which property is used as security.
