How do bridging loans work?

A bridging loan is a temporary solution to a cash flow issue. For example, should you want to buy a property but still own your current home as it has yet to sell, a bridging loan could come in useful.

In these circumstances, a bridging loan could be used to buy the new property before your existing one has sold.

In this instance, the bridging loan could be secured against both properties; the existing property and the new property. By securing the loan against both properties, this can help to keep the cost of borrowing the funds lower as with two properties secured against the loan, a more beneficial rate of interest could be offered as the loan is lower risk.

When it comes to determining whether a bridging loan is a right route for you to go down, an assessment will be undertaken to determine how the loan should be repaid. If it is a residential property that you are using the loan for, then the sale of the existing property tends to be used, and if this doesn’t offer the correct amount of funds, then usually a standard mortgage would need to be put into place to cover the funds.

It is essential that when a bridging loan is approved, an exit strategy is in place, which is why it’s so important to ensure that a long-term mortgage is affordable and likely to be approved.

Bridging funds tend to be offered in amounts ranging from £25,000 upwards, dependent on your personal circumstances.

What are the costs associated with bridging loans?

Short-term finance tends to be more expensive than longer-term finance. This means that a bridging loan will come with higher rates of interest than a mortgage.

It is important to understand that bridging finance acts as a means to an end, offering a solution to bridge a short-term funding gap. Bridging finance is not a long-term solution to a financial problem, it simply acts as a short-term solution.

A bridging loan comes with a lender arrangement fee which typically comes at a rate of 2% of the loan amount. This fee is usually added onto the loan and does not need to be paid upfront.

The interest rate is calculated monthly with the monthly repayment rate depending on the value of the loan, although in instances of non-regulated bridging other key factors will be taken into account, such as property type, exit strategy, and location. These variables will be used to determine how much interest should be paid.

How it works is that bridging finance interest payments are accrued on a monthly basis, but are usually only paid back at the end of the loan period. The good news is that each month you won’t need to cover this cost, instead it will need to be paid at the end of the loan period.

It is important to remember that when it comes to bridging loans, there are also administration fees that need to be covered.

A solicitor will need to be involved in making sure that the legal side of the loan application is done correctly – the legal costs tend to be similar to the legal costs associated with a mortgage.

Valuation fees will also need to be covered and a valuation will need to be carried out by an independent surveyor.

Speak To Us Today

Here at OneMP, we offer a tailored approach to bridging loans. Regardless of your bridging loan needs, we are able to create a custom solution that will offer the best fit approach to helping to manage your financial situation.

Contact our team of highly skilled, bridging loan specialists today to learn more about how we can help you.

Whether you require financial support to buy a domestic property or to support the purchase of a commercial property, we specialise in making it happen.