How does a bridge loan work?

We will explain below how a bridge loan works, who they are for and how we can help you find the right one for your circumstances.

A bridging loan (or bridge loan) is very useful when you need to borrow money for a short period of time. They are often used to ‘bridge the gap’ when you want to buy a new home before you sell your old one.

Bridging loans are also very useful if you decide to purchase a property at auction. This is because when buying a property at auction you will need the money immediately and may have not sold your current property.

How does a bridge loan work?

There are two main types of bridging loan. A closed bridging loan is when there is a fixed repayment date and individuals are usually given this kind of loan if they have exchanged contracts but are waiting for their property sale to complete. An open bridging loan, on the other hand, has no fixed repayment date, however you would be expected to pay it off within one year.

When we source bridging loans on behalf of clients, we have to prove to the lender that the client has a clear repayment strategy in place such as using equity from a property sale or taking out a mortgage. We also have to show evidence of the new property they intend to purchase, the price they plan to pay for it and proof that they are selling their current property (if relevant).

How much does a bridge loan cost?

A bridging loan is usually priced monthly because people tend to take them out for a short period of time. They can be very expensive with some fees being in the region of 0.5 – 1.5% per month. This makes them more expensive than a normal residential mortgage. They also often have set-up fees which are usually around 2% of the loan you want to take out.

Bridging loans providers might lend anything between £25,000 to £25million, however, you will only be able to borrow a maximum loan-to-value (LTV) of 75% of the value of your property.

As with everything, there is always an alternative to a bridging loan and this would be to remortgage your current property onto a buy-to-let mortgage and use the equity released to buy a new property.

If you would like to speak to a mortgage adviser to give you the best advice for your personal circumstances, please get in touch.

*Please note: The Financial Conduct Authority does not regulate Buy to Let mortgage. Bridging loans are not regulated where they are secured against an investment property. Your home maybe repossessed if you do not keep up repayments on your mortgage or other debt secured against it.

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