Are Property Bridging Loans a Good Idea?
In property sales, three things are often seen as essential. Speed, value and cost. You want the fastest sale, for the best price with the lowest possible fees. Sometimes, however, things get in the way and cause one, or all these elements to become disrupted, causing the sale of your home to come to a sudden halt. This is made even worse if you need to buy another property fast but are now unable to fund that purchase due to your sale stalling.
One solution to this is a property bridging loan, a way where you can still finance the purchase of the new home whilst waiting to sell the other.
For some people though, this is an avenue never previously explored, and with good reason. Whilst offering a practical solution, they can be expensive and plunge your property plans into more chaos than you may have first thought.
In this edition of our blog, we look at property bridging loans and whether they offer the answer for those in need of a quick route to purchase a new home.
What is a property bridging loan?
A property bridging loan is a short-term finance solution that enables a home buyer or property developer to fund the purchase of a home or commercial property whilst waiting for the funds from another property sale to become available. Classed as a secured loan, a bridging loan for property must have an asset secured against it in case it cannot be paid back. In the case of property, this would be your existing home. With concerning interest rates, they are deemed by many to be an extreme solution, but thanks to their quick accessibility, they prove to be popular with those determined to secure a property fast.
How does a property bridging loan work?
Property bridging loans work differently from a mortgage. Firstly, they are short-term, with often just a year or less to pay them back. Secondly, the amount you can borrow is not based on income, and instead, is based on how much equity you have available.
The bridging loan works by covering the gap between the amount you have for your house purchase and the amount you need.
For example, you want to purchase a house for £450,000 and a deposit of £150,000 is required. The remaining £300,000 is to be covered by your mortgage. With your current property still unsold and only £75,000 saved for the deposit, you need to find the additional funds to fulfil the deposit value. This is where your bridging loan comes in.
You will be loaned the missing £75,000 and then pay it back upon the sale of your home. However, different types of bridging loans exist and knowing the difference is essential.
What are the types of property bridging loan?
There are two different types of bridging loan which can be split into two further categories depending on the ownership of the home.
Open bridging loans
An open bridging loan for property has no set repayment date. Suited for those who are yet to find a buyer for their home, they offer a degree of flexibility but come at a cost. This is the more expensive form of bridging loan for a property. Whilst there is not a set time frame for repayment, many lenders will expect the funds repaid within two years, so check the small print.
Closed bridging loans
A closed bridging loan for a property has a set date for it to be repaid. This makes it cheaper than the open bridging loan alternative. These are often more likely to be chosen by those who have found a buyer for their home but are waiting for some final procedures to be completed.
Both though, it should be noted, have interest rates that many would see as unfavourable. We will look at these a little later.
What is a first charge and a second charge bridging loan?
Whilst you may have chosen an open or closed bridging loan for the benefit it may give you, the charge against it will also have to be considered. This is the element of the loan that is determined by your ownership status.
First charge property bridging loan
If you own your home outright, the lender of the bridging loan will apply what is known as a first charge against the money they are lending you. This means that it will be the first to be paid should there be a repossession of the property.
Second charge property bridging loan
If you still have a mortgage and therefore owe money to another lender as well as the bridging loan provider, a second charge will be applied to your bridging loan. This means that if you default on payments of the loan or mortgage; the mortgage lender will be paid back first and the bridging loan lender second. These loans may also be a little harder to get. The first charge lender – in this case, the mortgage lender – will need to grant their permission for a second charge bridging loan to be taken out.
The second charge loans are more expensive as the lender has more chance to lose their money than if it was a first charge bridging loan.
How much will a property bridging loan cost?
In simple terms, it isn’t cheap. Not only will you have interest at rates significantly higher levels than on a mortgage, but you will have a variety of other fees to contend with. These could include:
- Arrangement fees – Once you have secured your bridging loan you will be required to pay a fee. This can be approximately 2-4% of the bridging loan value.
- Valuation fee – The property you need a loan for won’t come for free so a valuation will be required to see if your bridging loan application is justified. The price of this will vary on the size and type of home but can be free or as much as £1,000 if a RICS valuation is carried out.
- Exit fee – You’ve paid the loan back and reached the end of the agreement, yet the lender still wants some money. You could be asked to pay an extra 1-2% of the loan amount as an exit fee.
What is the interest like on a property bridging loan?
Interest rates on property bridging loans are high. This is because you are borrowing for the short term and are often borrowing a substantial sum. Due to the short-term nature, interest is charged daily and can be charged in three ways:
- Monthly – You pay off the interest each month and it won’t be added to the loan.
- Retained – You borrow the interest for an agreed period and once the loan is paid back, any unused interest is given back to you.
- Rolled up – Interest is added to the loan and paid upon clearing the loan.
Typical rates for property bridging loans can range from 0.5%-2% per month. This can mean that on a short-term bridging loan paid back over just 3-6 months, you could see £8-£10,000 worth of interest added.
How do you get a property bridging loan?
Applying for a bridging loan for a property requires specific information and an exit and contingency plan.
Along with providing details of the property you are buying, you will need to include information about the property you currently own, any outstanding mortgage on it and how long you plan to have the bridging loan for.
The exit and contingency plans are important. Without them, you won’t be granted the loan. The lenders want to see how you plan to pay it back – normally through the sale of your property – and what you will do if your planned repayment doesn’t materialise. For example, if you are certain your house will sell and acquire a loan on that pretence, only to have the sale collapse, the lender will still want their money back. You need to be able to prove how you can achieve that.
Pros and cons of a property bridging loan
A bridging loan for a home can provide you with a quick solution and help you achieve your property goals. However, they are extremely expensive and are secured against your property.
Pros of a property bridging loan
A property bridging loan provides quick access to cash to enable you to complete the house purchase you desire. Rather than have the long waits associated with other funding methods, this form of funding can be accessed in days rather than weeks or even months.
In addition, where your sale may be delayed, a bridging loan helps you keep your purchase on track.
Cons of a bridging loan
The cons of a property bridging loan must be given a lot of thought. Monthly interest rates on them can be as high as £2,000 or more. Factor in the other fees associated with them and suddenly you have vast outgoings that could have been better utilised.
As mentioned previously, a bridging loan is a secured loan, so should there be any issues with payments or delays in the sale of your home, you could lose your house to recoup the debt.
Whilst bridging loans do help facilitate the purchasing of your new home, it does come at a significant cost. There are easier routes to help you achieve this though. Gaffsy, for example, are cash house buyers and guarantee your house sale within just seven days. With no need to secure a loan to purchase your next home, and no threat of losing your house to cover any costs, our model provides you with safety and security. Our fast house sale process works to your timescale, allowing the move to happen as and when you need it to, and best of all, it’s free. No costs for you to bear at all. Speak to our property experts today to find out more.
