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A bridging loan is a short term way of borrowing money, essentially to ‘bridge the gap’ before a standard mortgage can be arranged on a property. Bridging loans are most commonly used to purchase a property at auction, where the funds are often required within 28 days which does not allow enough time for a mortgage to be arranged. Another use for a bridging loan may be if you wish to purchase a new home before your old one is sold to ensure you have the available funds when needed, or if a property is unmortgageable and funds are needed to improve the property to enable a traditional mortgage to be arranged. It’s crucial to note that bridging loans are short-term finance, and the idea is that a mortgage will be arranged within 6-12 months in order to repay the loan.
How much deposit do I need for a bridging loan?
Unlike standard mortgages, bridging loans have much lower Loan to Value restrictions, meaning a higher deposit is normally required. It’s unlikely you’d be able to raise a bridging loan with just a 5% or even a 10% deposit, whereas most standard mortgage lenders do enable loans of up to 95% Loan to Value. Bridging loans are typically capped at 75% Loan to Value, meaning you will need to supply at least 25% of the property purchase price as your deposit.
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When does a bridging loan need to be repaid?
Bridging loans are typically arranged on a ‘closed’ or an ‘open’ arrangement. Closed loans have a fixed repayment date, which is where the buyer will be able to anticipate the date a loan will be paid off. For instance, if you are waiting for your property sale to complete before having the funds available to repay the loan, and have a set exchange/completion date. An open bridging loan has no fixed repayment date and can be repaid whenever the funds become available, however typically bridging loan providers require the loan to be repaid within a year.
How much does a bridging loan cost?
A key factor to note about bridging loans is the cost; they often carry much higher interest rates than a standard mortgage. This will mean that the amount you repay is much higher than the loan you initially take out, with fees generally between 0.5% – 2% per month. The interest works out as costing a lot more than a standard mortgage, as the interest is calculated monthly rather than annually. Bridging loans typically carry higher arrangement fees at around 1-2% of the loan amount, which is an added cost to consider, as well as valuation fees and solicitor fees which will still be required as per a standard mortgage.
If you feel your current circumstances require a bridging loan, get in touch with our expert brokers today who can discuss this with you and determine the best financial arrangement.