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An introduction to bridging loans

This type of loan will allow you to use money to make a purchase while you free up cash from your other investments or assets. This is a useful tool for bridging the gap while you wait to access a longer-term source of income or loan, such as mortgage, including a buy-to-let. This quick and easy short-term cash flow allows you to continue making property plans.

Who are these bridging loans aimed at and how much will they cost?

The target demographic is commonly landlords and property developers. It’s a useful solution for those who snap up properties at auction as it can help plug the gap while the developer waits for a mortgage to be approved.

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Are these loans short or long term?

This type of property financing helps people to bridge a gap when needed, for example, when they approach the closing date to put down a deposit on a property. These loans which can be obtained swiftly are usually short-term and interest-only. A loan is offered, based on the value of the property, and whether you can pay. It’s important that you can demonstrate your ability to repay. Interest rates are typically far higher than mortgages.

What do the terms first and second charge mean?

When you opt for a loan, a ‘charge’ is placed on the property. First or second charge determines which lenders will be reimbursed in sequence if you are unable to keep up with the repayments. Both a first charge and a second charge loan take the property as a security. If you have a mortgage outstanding on your home, the additional bridging loan will be a ‘second charge loan.’ This means that if you are unable to re-pay and your property is sold to pay back the borrowed figure, the mortgage lender would be the first to be paid off. However, if you own your home outright, a first charge loan would apply. This means that the bridging loan lender is paid back first if you fail to maintain the payments.

How long are the loans for and how much can I borrow?

The bridging loan, whether it is fixed or variable, typically spans around one year to three years. You may apply for a loan for anything between £20,000 to £20m. It’s important to understand that you will only be able to receive a maximum loan-to-value ratio of three-quarters of the current value of the equity in your home. Those taking out a first charge loan can usually borrow a higher figure. According to Buy Association bridging loan lending has risen steeply in 2022, with investors seeking to secure this type of cash injection.

Open and closed bridging loans

There are two types of loan – open and closed. A closed loan will have to be paid back on a fixed date. This loan is useful if homebuyers have exchanged contracts but are waiting for a sale to complete. An open loan has no fixed date for full repayment, but the expectation is that it should be settled within a year.

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What should I consider when taking out a loan?

Regardless as to the loan you opt for, the lender will want to see proof that you will be able to meet the payments. This can be demonstrated through taking out a mortgage or having equity from a home sale. The lender will also want to know the value of the property. Most importantly, anyone taking out a loan of this type should have a substitute plan in place in case the repayment vehicle fails.

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