So you have found your dream home in London and need to move fast before it is bought by someone else. But the problem is your current home has still not sold, and you don’t have the deposit to buy it.
What is the solution? Enter bridging loans; a bridging loan is a short term finance facility that features a quick application process.
There are many bridging loan lenders in the UK, especially in London. One only needs to go to a search engine and enter the keywords bridging loans London, and you will find dozens of brokers and lenders ready to win your business.
How does a bridging loan work?
As mentioned above, bridging loans are a short term finance option, typically between 3 to 12 months in length. In order to obtain a bridging loan, you must have an asset to put up as security against the loan, in most cases, this will be a property. The equity available in your property will determine how much you can borrow with bridging finance. Lenders will go up to 75% in most cases.
What are the costs you can expect?
A bridging loan facility is not cheap, although they are competitive in the UK due to many lenders currently in the market. There are several charges that you must take into consideration when you take this finance option. First and foremost, you will have a monthly interest charge on loan, which can range from 0.40% to 1.5%, and then there are other charges most lenders will levy. See below for more detail.
- Interest rate 0.4% – 1.5% (pm)
- Valuation fees
- Arrangement fee
- Solicitor charges
- Exit fees (in some cases)
- Application fees (in some cases)
- Broker fees (in some cases)
A valuation fee is required by lenders to determine the value of the property. Legal fees are also needed, and the borrower is expected to pay the legal charges on both sides. An arrangement fee is typically 1% to 2% of the overall loan amount. Some lenders may charge exit fees and application fees, although in the current competitive market it is not common. Finally, if you are using a bridging loan broker, then, you can expect to pay a broker fee of 1%.
It is useful to use a bridging loan calculator to get to know how much the loan will cost you beforehand.
Two types of Bridging Finance
There are two main types of bridging loans.
- Open bridging loan – an open bridging loan has no clear exit strategy. Let’s say you are buying a property to sell at a profit, this can take time, and there is no determined date it will sell, so the bridging loan is open and can be extended.
- Closed bridging loan – A closed bridging loan has a clear cut exit strategy, in this option you know when you will pay back the loan. For example, if you buy a property and you know you will get a home mortgage on the property by a specific time, you can then repay the loan.
Regulated or Unregulated
Bridging loans are regulated if you are buying a residential property as a home. An unregulated bridging loan is any use for commercial purposes.
Regulated bridging loans are regulated by the FCA, which offers protection to consumers. For more information, please visit the FCA website. https://www.fca.org.uk/.
Home in London
Now that we understand how bridging loans work, let’s see how we can use this loan facility to buy a home in London before the current home gets sold.
It would be best if you approached a broker for the application, as the broker will have access to many lenders and find the best deal in the market. The broker will also know precisely how to put together the application process to assure success.
You get enough loan amount to be able to put up as a deposit on the home you want to buy and subsequently get a mortgage on it. Once your old property gets sold, you pay off the bridging loan, that is your exit strategy.
Please be aware that a bridging lender will have the first charge on your existing property, and if you don’t repay the lender in time, it can get messy. Further charges will be added to the loan and worst-case scenario they can repossess the property.
It is always advisable to get sound financial advice from an expert before taking out a bridging loan.
Bridging loans are a unique, fast and flexible form of finance and can work well when you know how to use them properly. They are useful for many other properties related deals such as buying at an auction, property developments, refurbishments, buying derelict properties and property investments. For more information, please speak to a property finance expert like Global Property Finance Partners Ltd.