What is a bridging loan?
A bridging loan is a type of short term loan, often used when you need to buy a property before selling your current one – but is often used for other purposes too! These are a type of secured loan, which means you secure your home against it as collateral. As always, it’s important to remember that you may loose your home if you do not keep up repayments on these types of loans.
What are the other common uses of bridging loans?
1. Buying property at auction
A mortgage will take too long to come through you’re buying your property at auction. A bridging loan is much quicker as it’s designed for these types of purposes.
2. Renovation
These can range from a small scale renovation project to a complete loft conversation. Bridging loans are often used until its possible to remortgage to release equity.
3. Purchasing land
It’s difficult to use a traditional mortgage of purchasing land, if the property is not yet built. A bridging loan can be used to purchase the land and undertake development works until a traditional mortgage can be applied for.
Worked example for bridging loans
- You are buying a property worth £500,000. You need to put down a 25% deposit (i.e. £125,000) and plan to take out a mortgage for the rest.
- You have £25,000 worth of savings but plan to raise the remaining £100,000 by selling your current home. However, the person buying your current home has just pulled out so you’re unable to sell your home.
- A bridging loan can help you solve this problem as it can fund the remaining £100,000 for your deposit – until you can find another buyer to buy your home and pay this off.
How much do bridging loans cost?
- Valuation fee
As with a traditional mortgage, a bridging loan lender will want to undertake a valuation of the property to ensure it’s worthwhile security. A valuation will therefore need to be done. However, the good thing is, quite a lot of bridging loan lenders tend to undertake desktop valuations – which drastically helps speed up the process. - Arrangement fee
There is usually an arrangement fee to pay to the lender. This is a percentage of the loan and usually starts a 2%. - Legal fee
Whilst you have to pay your own legal fees, some lenders also charge a legal fee for their legal representation too. - Admin fees
Most lenders charge an administrative fee and usually starts at £500.
