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Whether you are considering getting a bridging loan, or are just curious to find out more about them, you will discover all the information you need in the post below.
What are bridging loans?
Bridging loans are a type of short-term borrowing that are secured against your property and that offers a bridge between two financial states. For example, if you have bought a home, but then your previous home failed to sell, you may need an amount of money to cover the mortgage payment on your old property because all your money is going to cover the mortgage payment of the new property, and the costs of moving house.
Typically bridging loans can be closed or open. If they are closed, this means they have a set date by which the full lump sum needs to be replied to. This is often around a 12-month period but can vary depending on the loan provider and the borrower’s needs. If a bridging loan is open it means that the borrowers can pay back the money as soon as it’s available.
First charge and second charge bridging loans
There are two types of bridging loan, first charge and second charge. The charge in this case is the charge for the loan that will be levied against the sale of your home if you cannot repay the loan.
You can only get a first-charge loan if you have a property where no other loans are secured on your property. If you do have other loans such as a mortgage you can get a second charge bridging loan. This means that if you cannot pay back the loan, and your property is sold to cover what you owe, the other loans will be paid off first. This makes second-charge bridging loans more risky than first-charge ones for the lender and that is why they often come with additional/higher fees.
Why might someone need a bridging loan?
Bridging loans are most common in the area of property purchase. This is because buying a property involves large sums of money, and people can often get caught in a situation where they are stuck between needing to pay large sums of money, while not having access to their assets as they are tied up in their property. This is why they need a bridging loan to get them out of this state.
Other than being stuck with two properties on your hands and only having the money for one, additional reasons to need a bridging loan could be wanting to buy a property at auction, or flipping property. Bridging loans are also sometimes available to businesses as well, and they can be used to finance urgent outgoings like rent, utilities and payroll.
How does interest work on bridging loans?
Interest on bridging loans tends to be higher than on other kinds of loans. This is because they are short-term, and often in high demand with people needing a large amount of money quickly. The interest on a bridging loan that you will pay is calculated every month that you hold the loan. This means the shorter time you keep the loan, the less you will have to pay overall.
How can I get a bridging loan? **
Most banks in the UK do not offer bridging loans to the public, although some may still offer this type of borrowing to businesses. What this means is you will need to find a broker for bridging finance to work with who can secure you this type of loan. The good thing about working with a broker is that you can get them to secure you favourable interest rates with the lender, which means you’ll pay less back per month for the duration of the loan, saving you money.
How can I increase my chances of getting a bridging loan?
Just like any loan, some things will go in your favour if you are looking to get a bridging loan. The first of these is that you have a good credit score. This is because a credit score represents how trustworthy lenders can find you when they lend you money. A high credit score means you have regularly paid on time and can be relied upon. A low credit score may suggest that you have trouble making payments on time or default on loans and credit. This would make you a much less preferable prospect to a lender, especially for a large lump sum like a bridging loan.
Another factor that lenders will take into account before awarding a bridging loan is your debt-to-income ratio. What this means is that they will check whether your income can easily cover the monthly payments you will need to make or whether it will be a struggle for you. If it’s the former then you are more likely to be granted the loan, than if it’s the latter. It also means that even if you have a large amount of debt, your income covers your repayments you may be granted a bridging loan.
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