At Manchester Money, we understand that the world of finance can sometimes be misunderstood. Especially in the Bridging Loan arena. Lots of businesses and people shy away from using them as they don’t fully understand how they work.
We’ll attempt to put your mind at rest and explain what a bridging loan is, its benefits, its pitfalls and how it works. It might well be just what you’re looking for in the interim.
Over time, bridging finance has increased in use, as mortgages are taking longer to process, so when time is of the essence, only a bridging loan will do.
Using a bridging loan versus a mortgage can be considered pretty risky. It can often be seen as expensive; however, when used correctly, bridging can be a powerful form of finance and potentially the only option in securing a good deal.
So, what is a bridging loan?
Simply put, it’s a short-term loan, and its purpose is to help property buyers and developers in the interim period before the more permanent form of finance has been arranged, such as a mortgage. It’s a little like having a short-term mortgage. It’s called a ‘bridge’ because that’s what its purpose is. It ‘bridges’ the gap.
Chat to us here at Manchester Money, and we’ll help you get your funds pretty quickly versus the traditional mortgage process, making them a very accessible and convenient form of short-term finance.
Be aware - bridging loans usually come hand in hand with high-interest rates and fees. Because of this, they are mainly used as a last resort. That to one side, they can make financial sense when used appropriately.
How do mortgages and bridging loan finance compare?
These two types of finance do share quite a lot in common. Firstly, interest is paid on the term of the loan until the loan is repaid in full. Bridging loan lenders will place charges on assets and the value of the loan is determined by the value of the property. Lenders who offer mortgages will do exactly the same.
As with mortgages, bridging loans are also offered at variable and fixed rates. But, be cautious, as the rates are much higher than they are with a mortgage.
However, a bridging loan is a very short-term solution and doesn’t take long to arrange and get your hands on the funds. Versus the traditional mortgage which is a lot more intricate and can take weeks or even months before funds are released. Bridging loans last up to a year, whereas a mortgage can be right up to 30 years.
Don’t be put off by the bridging loan, though. The lender won’t assess your income, and it also can be paid back in one lump, which is great if you’re waiting for your mortgage to come through or for the sale of another property to be completed.
Additionally, bridging finance is available on pretty much any type of property, whereas mortgage lenders can be a bit picky. For this very reason, bridging loans are extremely popular with property developers, as generally, those auction-style properties are run down and probably not mortgageable. In that instance, a bridging loan is the perfect ticket!
Are there different types of bridging loans?
The finance world can be a veritable nightmare, but not to worry, as Manchester Money have experts in all fields of finance. As with other forms of finance, bridging loans are also packaged up in different formats.
So, if you have a mortgage on your property, it’s likely that your mortgage lender will have what is called a ‘first-charge against it. This means that your lender will secure the loan against your property in the form of a charge, and it will be registered with the land registry. Also legally binding.
Bridging loans are also secured in the same way. It would be made clear that the bridging loan lender would have first priority of repayment on the off chance you defaulted on your loan.
If you’re midway through selling your property but haven’t yet sold it and then also took out a bridging loan to secure your new property, then the loan would be secured on your new property as a first charge. This is because there aren’t any other charges on your new home.
The bridging loan can then be used to pay off any mortgage when moving house. Your bridging loan would pay your lender the balance of your mortgage. Thus clearing their charge on the property.
Quite simply, a ‘second charge’ is an indication that the bridging lender has access to any funds left over after the ‘first-charge lender has recouped their monies.
If a bridging lender wants to place a charge on your current home, which already has a ‘first charge’ on it with your mortgage lender, then this would be known as a ‘second charge’. It’s also likely at this point that the first charge lender will need to provide consent for any additional lenders who may wish to secure charges on the same property.
As a point of interest, it is possible to place charges on multiple properties, but that comes with a lot more risk, as it enables bridging lenders to access more than one property, should something go awry. If the bridging lender only has a charge on the one property, then they can only claim their funds on that specific property.
A closed-bridge loan is for such an occasion when there is a dated exit strategy. You may be in a position whereby you have a buyer who has exchanged contracts, but not yet completed. Once completion has happened, and you’ve got your funds from the sale, then the bridging lender can then be paid back.
As there is a clear timeline for this kind of procedure, as in an exit strategy, this would be known as a closed-bridge loan.
As the name suggests, an open-bridge loan has more risk against it, as there’s no fixed date for when the loan is to be repaid. However, most bridging lenders request that any monies be paid back in 12 months.
Usually, you would use an open-bridge loan if you’re a home-mover and as yet, you’ve not agreed a sale for your existing property. A property developer may well use an open-bridge loan to fund a home they’re buying to do up and then sell on.
Regardless of the loan you choose, all bridging lenders will want to see evidence of your exit strategy. Such as your mortgage or funds from the sale.
Open-bridge and closed-bridge loans can be secured at both first and second charges, depending on the nature of your bridging loan.
Want to talk things through?
Then give us a call at Manchester Money. As with all things finance, we have experts on hand who can talk you through the bridging loan process. We can help determine if it’s the right thing for you!