What is a property bridging loan?
A property bridging loan may be suggested if you’re struggling to coordinate a property sale and purchase, but what is one and how could it help your house move?
In this guide
- What is a property bridging loan?
- How does a bridging loan work in the UK?
- How much does a bridging loan cost?
- How high is a bridging loan interest rate?
- How to get a bridging loan?
- Are there many bridge loan lenders?
- How long does it take to get a bridging loan?
- Are bridging loans for a house purchase a good idea?
- Is there an alternative to a bridging loan?
What is a property bridging loan?
A property bridging loan (also known as a bridge loan) is a short-term secured loan that can enable a house purchase to proceed before the funds from a related property sale become available.
How does a bridging loan work in the UK?
Depending on your personal circumstances, you can either apply for a property bridging loan with a pre-determined repayment deadline (known as a closed bridging loan), or one with a flexible repayment date (known as an open bridging loan). You may also have the option of either repaying the interest monthly or storing it up and paying it all in one go when you repay the loan.
Should I choose an open bridging loan or a closed bridging loan?
A closed bridging loan would be appropriate if you have already exchanged contracts on the property you’re selling and have a definite date for when the funds will be released.
An open bridging loan would be more appropriate if you’re unsure on the exact date you’ll have the funds available to repay the loan.
A property bridging loan is a short-term loan and the lender would usually expect the funds to be repaid in full within a year (although bridging loans with longer repayment terms may be available on request).
How much does a bridging loan cost?
In addition to monthly interest, there are a number of other costs and fees associated with taking out a property bridging loan.
These may include:
- Broker fee
- Lender fee
- Arrangement fee
- Valuation fee
- Exit fee
Here’s an example of how much a bridging loan might cost you.
Amount borrowed: £100,000
Arrangement fee (1-2%): £1,000-2,000
Lender fee: £2,000
Broker fee: £1,000
Valuation fee: £500
Exit fee (1%): £1,000
Interest accrued: £500-£2,000 per month As you can see from the bridging loan example above, a bridging loan is not a cheap option, but does offer a certain level of convenience.
How high is a bridging loan interest rate?
You can expect to pay between 0.5% and 2% interest each month.
How to get a bridging loan
You can search for competitive property bridging loans on most online comparison sites, through a bank or mortgage lender or through a financial advisor.
When you apply for a bridging loan you will be required to give the lender a range of personal and financial information, including:
- The details of the property you’re buying
- The details of the property you currently own
- Details of any outstanding mortgage
- How long you will want the loan for
- Your plan for repaying the loan
- A contingency plan for how you will repay the loan if your current property
hasn’t sold by the time the loan is due to be repaid.
Are there many bridge loan lenders?
The bridging loan industry is growing. There are currently more than 100 property bridging loan lenders in the UK.
How long does it take to get a bridging loan?
Bridging loans can be arranged in just a few days, if required.
Are bridging loans for a house purchase a good idea?
Taking out a property bridging loan has pros and cons. Whether a bridging loan is the right option for you will depend on your personal circumstances.
- Quick process
Unlike other types of loans, a property bridging loan is designed to step in last minute to enable a property purchase to proceed. This means the process can be completed very quickly, often in just a few days.
- Can stop a property purchase falling through because your sale is held up
If you’re struggling to make your sale and purchase tie up, and are worried that one or both of the transactions could fall through, a property bridging loan could allow you to keep both on track and secure your new home.
- Flexible repayment schedule
If you don’t yet have a date for the sale of your property, and aren’t sure when you’ll be able to repay the loan, an open bridging loan can give you flexibility. You will need to consider what you will do, and how expensive the loan will become, if you’re still struggling to sell the property several months down the line – a property bridging loan is only a short-term solution, but it will buy you some time.
- Bridging loans are an expensive way to borrow
Interest rates on property bridging loans are very high. You can expect to pay between 0.5% and 2% interest each month, and many property bridging loan companies will lend a minimum of £100,000. That would mean monthly interest of between £500 and £2,000.
- Other costs and fees
In addition to a high interest rate, you’re likely to be required to pay a number of other fees and costs associated with the property bridging loan that can amount to several thousand pounds.
- The loan is secured against your property
A property bridging loan will need to be secured against a property, which means if you struggle to repay the loan, your property will be at risk. It is therefore not something to enter into lightly.
Is there an alternative to a bridging loan?
If you’re looking for a way to move forward with the purchase of your new property but are struggling to tie up the sale of your current home, there are a few different options available to you.
Cash home buyer:
If you need a quick solution, a cash home buyer could be a great option. They offer a quick, guaranteed sale of your current property, leaving you free to purchase your new home with no hassle, no ties and no financial commitment. A genuine cash home buyer will purchase your property at a discount, but they can complete the sale in as little as a week so they’re a great option if you need a quick solution. The discount applied is also likely to work out cheaper than the cost of a bridging loan if you think you’ll need the bridging loan for longer than a month or two. A cash home buyer can buy your property on a date of your choice, so will give you complete flexibility with when your new property is ready. You’ll also have the freedom of being able to enjoy living in your new home without the financial worry of loan repayments and struggling to sell your old property.
If you can’t afford a property bridging loan and think your property might appeal to property investors or landlords, you could consider selling your property at auction. Whether this is the right option for you will depend on how quickly you need to sell, as auction sales often take longer than people think. You’ll need to allow around a month for pre-auction marketing and then a month from the auction date to sale completion. It is worth noting, however, that there’s no guarantee that your property will sell at auction, and it can be tricky to time a property auction sale with the purchase of a new property. Property auction sale prices are also very unpredictable, which can make it very hard to budget accurately for your new home.
If you have enough equity in your current property, you could consider refinancing with a buy-to-let mortgage and letting your current property out. Of course, this will only be an option if you have enough equity in the property to remortgage and be able to release enough funds for your new property deposit, or if you have other means of raising a deposit. You’ll also need to factor in time to find a tenant and also plan how you would manage financially if your rental property were to be vacant for any period of time.
As we’ve discussed above, a property bridging loan can offer a quick and convenient solution to help you secure a property before your current property sells, but it is definitely not a cheap option and should only be used if you’re happy that you can comfortably afford it and only need a short-term solution.
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