Posted by admin On December 21st 2020

A bridging loan is useful if the person needs to borrow money on a short-term basis. It is handy if they wish to purchase a new home before selling the old one. This type of loan can be used if a property is purchased at an auction whereby the money is needed immediately but the person may not have sold their current property.

Bridge loans are usually paid back on a monthly basis, due to the fact they are taken out for a very short-term period.

One downside to such a loan is that the interest can be very high, typically varying from 0.5% to 1.5% per month, thus making the APR (Annual percentage rate) between 6.1% and 19.6%, which is considerably higher than many mortgages. In addition to this, there are also set-up fees to take into consideration, which typically start at around 2%. It is advisable that a bridging loan is only taken out if it is needed purely for a short period of time.

The two types of bridging loan are ‘closed’ and ‘open’.

Closed bridging loans:

With a closed loan there is a set repayment date, which is typically given when contracts have been exchanged but you are waiting for the sale to complete.

Open bridging loans:

With an open loan it is normally expected that it will be paid back within one year although there is no fixed date.

With any type of loan, the lender needs to see evidence of the repayment strategy: for example, using equity from a property sale or taking a mortgage. In addition to this, the lender will also like to see evidence of the new property and a price plan for the payment. It is advisable that the borrower has a secondary back up plan in case the first strategy fails.

When you take out a bridging loan, a ‘charge’ will be placed on the property. What this means is that, should the loans fail to be repaid, there is a legal agreement on which lenders get their money first, and the property is taken as security in case the borrower defaults on repayments.

If you still have a mortgage on the property, the second charge loan means that, if the borrower fails to maintain repayments, the home will be sold to pay off the debts and the mortgage will be paid off first. However, if the borrower owned the property outright or was taking out the bridging loan to pay the mortgage in full, this loan would be repaid first if the borrower fell behind with repayments.

Secured Loans:

A secured loan (sometimes referred to as a homeowner loan) uses the borrower’s property as security against the sum that is being looked at being borrowed. If a large sum is required (for example, anything in excess of £20,000) and the borrower has a poor credit rating. It is vital that the risks are understood when taking out this type of loan as failure to maintain payments can result in the property being repossessed.

Personal circumstances are a contributing factor both when loans are being determined and also the terms in which the loan is granted. Other factors taken into consideration are:

  • Your credit score
  • Your income
  • Existing commitments (other loans etc.)
  • The available equity in the property

If you have equity in your property and wish to borrow anything more than £15,000, then this variation of borrowing could be ideal. The risk, as previously stated, can involve seizure of the property if repayments are not kept up.

Types of secured loan:

Short-term fixed rate secured loans – Usually set out over 1-5 years, the borrower repays a fixed amount throughout the agreed term. The repayments then revert back to the standard variable rate, meaning that payments can go up or down.

Fixed for term secured loans:

These payments do not fluctuate: you pay a fixed amount every month, and you are able to budget for your outgoings, thus giving you peace of mind and less stress.

Variable rate secured loans:

Depending on the Bank of England’s base rate or the force of the market, the interest paid may fluctuate. This means that monthly repayments and the total amount repayable can either increase or decrease. If interest rates increase, you may end up paying more than was first anticipated and this could result in payments not being met.