Bridging Loans

by Mark Johnston

The UK bridging loan market is estimated to be worth around £2.5 billion. Even in the current climate bridging loans seem to be growing by 25% year on year.

These particular loans can be used for almost any purpose, providing there is enough equity in a property. The most common being to ‘bridge’ the gap between buying a new property and the sale of an existing property.

Buyers who are about to purchase a property but have a problem with the sale of their existing property have two options, either take on another mortgage or a bridging loan. Although both will leave the borrower paying two loans at once.

However with the UK property market as it is in the current climate many sales are falling through, so unless a borrower has an almost ‘cast-iron’ certainty that their sale will go through the use of a bridging loan should be carefully though through.

There are two main types of bridging loans, the ‘closed’ bridge and the ‘open’ bridge.

The closed bridge:

This is usually used by buyers who have already exchanged contracts on the sale of their existing property.

The open bridge:

This is usually used by a buyer who has found their ‘dream’ home but may not have put their existing property on the market.

Bridging loans fill a gap in the financial market where other more traditional methods are unsuitable.

Bridging finance is also used for:

–          maintaining a place in a sale chain thereby preventing the chain from falling apart

–          auctions as the buyer usually has a deadline of 28 days in which to complete

–          short term cash flow problems where a business customer is unexpectedly late in paying and the funds are urgently needed in order to continue trading

–          development, in order to fund the building of residential and commercial units, which on completion the nits can be refinanced or sold

Many borrowers use these loans as they can be arranged very quickly and funds can be available within 48 hours.

Bridging loans are unlike most other traditional mortgage products as they are available to anyone such as the self employed, the retired and even those who have county court judgements or individual voluntary arrangements (IVA), due to the flexible lending criteria. Basically providing borrowers have equity in their property they will be accepted.

These loans are always secured against a property, even if it is in need of renovation or restoration and borrowers can secure several properties in order to raise the required finance.

This type of finance has under gone something of a transformation over the last few years. The growth in the number of bridging lenders means there is more competition, which in turn has led to more competitive rates being offered.

Bridging finance however still involves high monthly interest rates, usually it is the Bank of England’s rate plus 2% to 2.5%, and therefore this type of finance is only intended as a short term method of borrowing.

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