Why Would I/We Want A Bridging Loan?
You might want a bridging loan to enable you to:
a. Buy a property at an auction where there is a limited time to complete a purchase, so a bridging loan would enable you to complete a purchase within an auction contract time-frame and you could then re-mortgage once the property has been purchased and refurbished, extended or whatever.
b. To buy a property that is not conventionally mortgageable i.e uninhabitable or with structural defects, making it not possible to obtain conventional long term finance. A bridging loan could be arranged to enable you to purchase the property, provide the funds for dealing with any structural issues with the property or completed refurbishment required in order to make the property mortgageable in a conventional way.
c. To buy a second property before you have sold your existing property. In some situations you may have the opportunity to buy a property in a location you particularly like where properties are few and far between, or where there is a price advantage if you can buy your new property immediately before you have sold your existing property. A bridging loan could enable you to buy the property of your choice in the location you wish to move to before you have sold your current property. In these situations it is normal for a charge to be taken on the property you are buying and maybe a second charge on the one you are selling.
Do I have To Pay Interest?
There are different ways of dealing with the interest on a bridging loan in some situations the interest could be added and deducted or there is the option for the interest to be rolled up and paid on redemption when the loan is redeemed, but you have to remember that in that situation the interest is compounded so it would cost you more at the end of the day. If you are able to pay the interest on a monthly basis that would be the cheapest option.
Borrowing on a bridging basis being short term the interest rate is not as competitive as a long term mortgage because the lender only has a limited period in which to make a profit on the transaction. Currently the lowest interest rate you could expect to pay or incur would be a rate of 0.49% per month. This means for every £1,000 you borrowed the interest incurred on a rolled up basis or that you would pay if you are able to make monthly payments is going to be £4.90 per month per £1,000 borrowed.
Whilst applications for bridging loans are not as complicated as applications for conventional mortgages, all lenders and packagers in the bridging sector are required to undertake normal credit checks and other enquiries to be sure that any bridging loan transaction is appropriate to the individual financial circumstances of each applicant. Any adverse credit that exists would not necessarily mean that a bridging loan is not available but it almost certainly would mean that the interest rate would be higher as the risk to the funder would be higher.
Generally speaking it is possible to consider bridging finance upto 75% of purchase price or valuation for residential security or 70% if it is commercial or sem-commercial security.