There are so many different types of loans on the market today and knowing which will be best in your individual circumstances isn’t always easy. If you’re looking to raise funds that you can spend on a property, whether this is the purchase of a new property or renovations for your current property,
Below we have explored bridging loans in much more detail.
Bridging finance is essentially a short term loan. Similarly to traditional mortgages, bridging loans are secured on an asset, like your property, and they can be a brilliant way to get quick access to funds. However, bridging loans tend to be more expensive than residential mortgages and they usually have very high interest rates and arrangement fees can be high. Interest is usually rolled up as monthly payments are not required, so the amount owing increases the longer the bridge is outstanding.
You can get a bridging loan in lots of different ways and it is most popular amongst people who are wanting to purchase a new property before selling or refinancing their existing property or clients wanting to renovate a property which is not mortgageable in its current state.
Lots of small and amateur property investors turn to bridging finance for the funds they need to buy unmortgageable properties or properties at auction. They then carry out various improvement projects to these properties and refinance with longer-term facilities once the property is habitable or lettable. Often, investors are then able to get a traditional mortgage with much more competitive rates.
Sometimes, bridging loans are also used to help people meet Inheritance Tax (IHT) liabilities. IHT is usually paid out of the estate, but if they’re unable to sell a property quickly enough, some people turn to bridging finance to enable them to pay HMRC within the required time frame and avoid tax penalties. The bridging loan is then repaid once the property has been sold.
Due to the fact that bridging loans are often arranged in just a few days, they are a great option to consider if you are in need of funds really quickly.
Bridging finance could be an ideal solution if you want to secure a new property before the sale of your current home and break the property chain.
However, they are a high-risk strategy.
Borrowers will need a robust repayment strategy as bridging loans will need to be repaid within a year so time is very much of the essence.
If you’re unable to sell your property within the fixed period of the loan, you could be put in a very difficult financial situation and you may be forced to sell at a loss in order to pay back the lender. As a bridging loan is secured on an asset, like your property, you risk losing this asset if you don’t meet your obligations.
You may sometimes hear bridging loans referred to as ‘last resort’ loans and they can be a very risky option, so it is essential to get some financial advice when contemplating bridging finance.
If you are interested in bridging finance and you’d like to speak to a mortgage advisor about the different options available in more detail, feel free to get in touch with our team at Mortgage Required.
We have many years of experience advising customers about all aspects of the mortgage market and we will be happy to provide you with the tailored guidance that you need. As whole of market advisors and regulated members of the Financial Conduct Authority, you can rely on us to provide you with professional, unbiased and honest advice, and we will help you to ensure you’re making the best possible decisions in relation to bridging loans.
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