Bridging loans are generally taken by the borrowers to sort out any problems (such as delays) that might arise while purchasing a property and can be instrumental in helping to ease your short term financial worries. The name 'bridging loan' is derived from the nature of the loan, which is designed to bridge the gap between the sale of your property and purchase of another property. These loans are always in a secured form, usually by pledging equity in a residential or commercial property. The loans are usually on a short term basis until a mortgage can be arranged.
Generally, people opt to purchase a property only after selling their existing property. However with a bridging loan this need not be the case. The loan amount usually ranges from £25000 to £500000 with a repayment term of one to twelve months. They are much quicker to acquire than standard mortgages (often arranged with 24 hours) and easy to access as long as you have reasonable equity in your property (usually 70% - 80%).
A bridging loan can effectively relieve you of the anxiety and dilemma of having to rush through the sale of your original property, plus the risk of receiving a reduced price in the process. Borrowers with a poor credit history can also acquire bridging loans, however it is advisable for you to do extensive research into the financial market, to ensure that a bridging loan is the correct solution for you. Most people look at the speed of availability and rate of interest when choosing a lender. The lenders charge a comparatively higher rate of interest than mortgage lenders, due to the increased risk on their behalf.
Bridging loans can be an efficient financial option for those people who want to buy a property and are in urgent need of funds to bridge the financial gap.
Examples of bridging loan uses are as follows.
1. A bridging loan is often acquired by developers wanting to start a project whilst a permit or approval is sought. Because there is no guarantee the project will happen it is unlikely that a conventional lender would accept the risk. Therefore the loan needs to be from a specialised lending source at a high interest rate who will accept the risk. Once the project is fully entitled, it becomes eligible for loans from more conventional lenders that are at lower-interest rates, for a longer term, and in a greater amount. A construction loan could then be obtained to pay off the bridging loan and fund completion of the project.
2. A consumer is purchasing a new property and plans to make a down payment with the proceeds from the sale of a currently owned home. Unfortunately the current home will not close until after the close of the new residence. A bridging loan allows the buyer to take equity out of their current home and use it as down payment on the new residence. This would be based on the expectation that the current home will close within a short time frame and the bridging loan can be repaid.
3. A bridging loan can be used by a business to ensure continued smooth operation during unstable times. For example when one senior partner wishes to leave, whilst another wishes to continue the business. The bridging loan could be made based on the value of the company premises, allowing funds to be raised via other sources for example a management buy in.
A property may be offered at a discount if the purchaser can complete quickly with the discount off setting the costs of the short term bridging loan used to complete. In auction property purchases where the purchaser has only 14-28 days to complete, long term lending such as a buy to let mortgage may not be viable.
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