Bridging Loan for House Purchase
Getting a mortgage is not the only option to borrow money to buy a property. In some situations it can make sense to take out a bridging loan – usually when you need to move fast. Here’s what you need to consider in deciding whether a bridging loan is right for you.
What is a Bridging Loan?
A bridging loan, or bridge loan, is a short term, high value loan. It’s designed to ‘bridge’ the gap between buying a property and having the funds to pay for it.
When would you use a Bridging Loan?
There are a few typical situations where people tend to take out bridging finance, which include:
- To buy a property without waiting to sell your existing home – You can then repay the loan as soon as your house sale completes.
- To break a property chain – Being a ‘cash buyer’ makes you a more attractive purchaser.
- To buy at auction – Buying at auction can get you a bargain price home, but you often need to pay in full within 28 days; which is not long enough to arrange a traditional mortgage.
- To buy a property for renovation – Some people use a bridging loan to finance a big renovation project, especially if the property can’t be mortgages in its current state
Bridging loans can be used both by individuals for a residential property or by businesses for commercial borrowing.
What are the features of a Bridging Loan?
The main features of a bridging loan are that they are high value and as short term finance they usually have a limit of 12 months.
They are also very quick to arrange, which is part of their appeal. You can gain approval and access the funds in just a few days.
A few other important features include:
- High interest rates – Borrowing on a bridging loan is more expensive than a mortgage as you are charged monthly interest.
- Deferred interest – You can wait until the end of the term to pay the interest due, and include it in the overall loan amount.
- 75% Loan to Value – Most lenders will give you a bridge loan worth up to 75% of the property value. To maximise the size of a bridging loan, you can secure it against both the property you’re buying and other property you own.
- Exit strategy – To get a bridging loan you will need to explain to the lender exactly how and when you will repay the debt.
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How much would a bridging loan cost?
The full cost of the loan depends on its overall size, the interest rate and arrangement fees. You may also need to pay property valuation fees.
If you were buying a property priced at £400,000 with a 75% bridging loan you will borrow £300,000. An arrangement fee of 2% would total £6,000. If interest is charged at 0.5% per month and you pay the loan back after 6 months, the total interest total would be £9,000. The total cost of borrowing would therefore be £15,000.
There can also be a difference in fees and loan totals depending on whether you have a first charge bridging loan or second charge loan. This refers to whether other lenders have first or second access to your property should it be repossessed.
How can a GPS Financial Broker help?
Buying a house can present all sorts of unexpected challenges, and GPS Financial are here to help. We’ve helped many clients get hold of their dream home with a Bridging Loan – especially when they have to act fast. We have decades of experience in property financial services and will explain all your options and find you suitable deals.
We look at your specific situation, your priorities and ambitions – then find the right products to match.
We are fully authorised and regulated by the Financial Conduct Authority. Contact us today for an initial chat about how GPS could help you.
As a property finance specialist based in Cardiff, GPS Financial has won the prestigious award for Best Firm: Bridging & Commercial in 2022. This award was given by Dynamo for Intermediaries, one of the leading Mortgage Clubs in the UK.
Your home may be repossessed if you do not keep up with the repayments on your mortgage.