What Is A Bridging Loan and When Should You Use One?

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What exactly is a bridging loan, and what do you use one for. This is a common question for many people looking for funding options to cover a gap between when you need to purchase something and when the funds are available from the sale of something else.

Sounds vague enough. It is basically a short-term loan to bridge a gap, usually when you are looking to buy a new property before you have sold your current home. They are also useful for people who like to buy property at auctions. You typically need to leave a 6-7% deposit upon winning an auction with full payment within a month’s time.

What Types of Bridging Loans Are Available?

There are two types of bridging loans: a closed loan and an open loan.

A closed bridging loan is when a fixed repayment term has been agreed upon. Typically, closed Bridging loans are offered when you have exchanged contracts on a house sale, but you are waiting for your property sale to be completed.

An open bridging loan is where there is no repayment date. Open bridging loans are offered with the expectation of the sum being repaid within a year.

What Documentation Do You Need for A Bridging Loan?

Whether you’re offered an open or a closed bridging loan, the lender will require evidence of your repayment strategy. This will be via using equity from a house sale or from taking out a mortgage.

You will also need to provide proof of the new property you are buying and how much you intend to pay for it. If applicable, you will also need to show proof of your current house sale or what you are doing to ensure the house sale.

When considering taking out a bridging loan, it is always advisable to have a backup plan for repayment if your proposed repayment plan falls, though.

How Much Does A Bridging Loan Cost?

Due to the circumstances of how you will be accessing a bridging loan and when you will usually find they are much more expensive than you are expecting. 

As a bridging loan is a short-term loan, the interest is worked out monthly, meaning you could be looking at around 0.5% and 1.5% interest per month. You may also have to pay a setup fee, which can vary but usually pitched around 2% of the total amount you need to borrow if the ledner requires this.

Because of this, it is important to consider all your options carefully before agreeing to a bridging loan and be confident you can pay it back as per your agreement.

Who Can Apply for A Bridging Loan?

Bridging loans are an option for people who have put their current property on the market and need to fund the purchase of a new property before they have sold their current one. It is also a great option for those who purchase properties at auction and need funding quickly to make the deposit wait for the mortgage application to come through.

The amounts offered will be based on your circumstances and the sum you intend to borrow. This isn’t a long-term borrowing option, and bridging loans are exactly that, to bridge a gap for the short term.

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Written by themoneyshed

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