What is a Bridging Loan?

A bridging loan is a short-term loan used to finance a short, undesirable gap. It is arranged to provide the quick finance needed to purchase an asset once more conventional finance is available. Bridging loans are used as ‘gap financing,’ that is, between buying one property and selling another or waiting for conventional financing. The maturity duration on a bridging loan is usually below one year.

Want to apply for a bridging loan?

The first step is to evaluate your position and decide whether acquiring the bridging loan is a wise decision. The second step is to apply for the loan; next, you will need some papers and complete a standard application with a direct lender.

The lender assesses your application:

Customers must prove solvency and repayment capacity, present the property, explain how the amount will be repaid, and describe the exit strategy. And they will also make sure you meet any other conditions for the grant.

You receive the funds:

If the application is granted, you will receive your money quickly, sometimes within a few days. The funds will be used for your stated purpose and utilised as per your specified objectives.

You use the funds for your intended purpose:

Some use it to buy a house for sale, pay an essential bill, or meet a short-term cash deficit in business. What is important is the intention to repay the loan.

You repay the loan:

Bridging loans are usually more expensive than other, more conventional loans because of the greater risk and shorter term. That means you must pay back the loan as soon as possible using the defined exit strategy. This normally marks a change whereby the property is sold or refinanced, or a completely different financing is sought.

Types of Bridging Loans

There are two main types of bridging loans:

Closed Bridging Loans:

A closed bridging loan has a set date on which both parties have already agreed for the full repayment. In this case, you obtain a specific sum of money once. This suboption is good if you need a particular sum.

Open Bridging Loans:

An open bridging loan has no fixed repayment date and is paid when the funds are available. It is similar to a revolving credit facility. It enables you to draw more than once up to the specified maximum limit, offering more flexibility.

What is Special About Bridging Loans?

While criteria vary between lenders, here are some general requirements:

1. You must have a property to use as security: It is a kind of loan where property, mainly an investment property, is utilised to offer security for the loan in the advent of non-payment. It must also have adequate equity to support such funding requirements.

2. You must have a clear exit strategy: There is normally a well-defined plan to repay the loan from the next property sale or through refinancing or any other financing.

3. You must be able to afford the repayments: It’s exactly like any other loan because you need to prove that you can pay interest on a monthly basis in addition to paying back the actual amount of the loan. They will check your income, assets, and financial records.

What are the Costs of a Bridging Loan?

Bridging loans typically involve the following costs:

1. Interest: According to the bridging loan calculator, the rate falls in the range of 0.5% – 1.5% per month. Short-term loans usually attract higher rates than long-term loans.

2. Arrangement fees: The setting and arranging of the loan costs 1% – 3% of the total amount required to be borrowed.

3. Valuation fees: An appraisal, especially of properties, is needed to track interest in the asset that has been pledged as security. This can cost £150 – £1,500.

4. Legal fees: Your solicitor will charge for drafting contracts and transfers if properties are involved.

5. Broker fees: In cases where the agency is involved, the commission will differ, but it commonly falls between 1% and 5% of the credit.

The Benefits and Risks Linked With Bridging Loans

Advantages:

1. Speed: The funds can be accessed very quickly from the application, which takes an average of 1 to 4 weeks. This means you can capture sundry crucial opportunities in a given time period.

2. Flexibility: You also have more control over how this money is spent, and some loans let you do it in stages.

Access to funds: Applying for a traditional mortgage or loan may even take a lot of time. A bridging loan is readily available to ensure that an individual gets capital before getting another source of finance.

3. Can help secure a property: Bridging loans can help you acquire the property you desire in a competitive property market by putting together the required finances in the shortest time possible.

Disadvantages:

1. Higher interest rates: In general, interest rates on bridging loans are much higher than those of typical secured lending rates of true peer competition and will vary depending on the term of the bridging loan.

2. Short-term solution: Bridging loans are short-term. To secure the loan, you have another financing option to repay it in 4-12 months.

3. Risk of repossession: If you fail to service the loan, the property you offered as security to the lender may be repossessed.

4. Fees and charges: The bridging loans also contain fees, commissions, and charges, which contribute to their cost.

Applying for a bridging loan

Determine your needs: First, determine exactly why the loan is necessary, how much it should be, and how the amount borrowed would be repaid. This will inform all other steps.

Research lenders: When getting a loan, do not stick to one lender’s broker. Instead, compare different lenders’ and brokers’ offers to get the best deal in terms of loan products and worthy interest rates. Understand the requirements that a person must meet to be considered for the job.

Gather your documents: The required documents tend to include proof of income, ability to repay, property valuation, exit strategy, and sometimes other additional information for the application.

Complete an application: With the lender of your choice, complete the bridging loan application. You may be expected to show documents and papers you have.

Receive a decision: Accordingly, the application for the loan will be compared to the loan terms and the ability to pay the loan upon its ease based on financing statements, the value of the property, and an escape plan. You will then get an approval or a rejection.

Complete the loan: If you are approved, you can finalise some documents and receive the money within the shortest time possible, even through a bank transfer on the same day.

Conclusion

All in all, bridging loans are a special type of instrument required to provide a significant amount of money within the shortest time when there is a switch between the sources of funds and/or sales of properties. They may allow life plans to go on smoothly as planned. However, the costly nature of the loans and the short repayment period used for bridging loans should be handled carefully.

The post Bridging Loans – Your Complete Beginner’s Guide appeared first on The Total Entrepreneurs.

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