7 Essential Bridging Loan Tips
A bridging loan can help you deal with your current commitments until you secure one or more sources of income. Sounds great, right?
Well, yes, but just like any other type of loan, bridging loans aren’t zero-risk. If you don’t know what you’re doing, you can get into debt or lose your property.
In this guide, we’ll give you 7 essential bridging loan tips that’ll help get the most out of it and secure a safe exit. We’ll also address some of the most common questions and concerns related to taking a bridging loan.
What Is a Bridging Loan and How Does It Work?
A bridging loan is a short-term loan that allows an individual or company to get through current financial burdens until long-term financing options are ready to be put on the table.
The term of a bridging loan is capped at one year, and the interest rates are usually high. Most of the time, bridging loans are secured by some form of collateral, like a property.
How Much Does a Bridging Loan Cost?
Other than the interest fees that usually fall within the 0.4 to 2% range, bridging loans may have some additional costs, like arrangement fees, administrative fees, and exit fees.
Multiple factors can affect the exact cost of a bridging loan, like available equity, property sale status, and the loan’s term and value.
Advantages and Disadvantages of Bridging Loans
Just like any other loan type, bridging loans have their share of pros and cons, which can be summed up as follows:
Bridging loans allow you to choose between postponing your repayments till you sell your house or settling them early. You don’t need to start making payments before your home is sold.
Did you just find your dream house? Luckily, you won’t miss out on it with a bridging loan. There’s nothing more frustrating than pinpointing the perfect real estate deal, only to find out that you don’t have enough money to purchase it. Of course, you could wait until you sell your current house, but the other house won’t wait for you!
Gives You More Time
With a bridging loan, you aren’t forced to sell your house at a low price just because you need to sell it quickly to get the new one. Instead, you’ll get the chance to compare between different offers until you find the best possible deal.
Easy Application Process
Applying for a bridging loan doesn’t require a tremendous amount of paperwork. Once you’ve valued the properties, you can apply for a bridging loan and get approved within a few days.
Compounded Interest Fees
The most obvious downside of a bridging loan is that you’ll have to pay interest fees compounded monthly. However, if you have a good credit score and a low debt-to-income ratio, you should be able to get a bridging loan at the lowest possible interest rates.
Similar to all other loan types, applying for a bridging loan requires non-refundable application fees.
Valuing your current house and the house you want to buy is necessary to get a bridging loan. Valuation typically costs around £1000 for the two houses. However, this number could be higher or lower depending on the condition of the houses and their sizes and locations.
Most bridging loans have a term of 6-12 months. In other words, you must sell your house within this timeframe. If you fail to find a good deal on time, the lender will intervene to sell it.
Miscalculating the required time needed to sell the house could also put you at risk of paying more interest fees. Additionally, selling the house at a lower-than-expected price means that you’ll be forced to accept a larger loan balance.
Secured loans require collateral, like your house. So, if you fail to repay the loan, you’ll lose your property.
7 Tips to Get the Most Out of a Bridging Loan
Now, let’s check out these 7 essential bridging loan tips that’ll help you get and exit a bridging loan smoothly.
1. Consider Whether a Bridging Loan Is Really Worth It
Most people choose to get a bridging loan only when they find a bargain deal for a better house than the one they currently live in.
If you can wait until you save the money needed for the new house without having to sell your current house, then, by all means, do it.
On the other hand, go for a bridging loan if you believe that such a good deal would be hard to come by again in the near future.
2. Get a Deposit Bond
A deposit bond can be a safe way for you to settle the bridging loan in case you default on it. Deposit bonds are provided by insurance providers.
On a side note, keep in mind that deposit bonds should only be considered if you need over 80% of the total cost of the new property and the loan amount.
3. Consider Opting for Expert Evaluation and Advice
Getting professional evaluation of the properties can make a world of difference when working through a bridging loan application process. It allows you to get the most accurate estimates, ensuring that your finances are correctly calculated.
What’s more, getting expert advice will make it easier for you to plan out your strategy for the loan.
4. Sell at the Right Time
Pinpointing the optimum time to sell your property is crucial when planning your exit strategy. After all, you don’t want to come out of the whole thing with a negative ROI.
Here are some of the factors to consider before selling your property:
There are two possible scenarios that you’ll find when checking market conditions: a “seller’s market” or a “buyer’s market”. As its name implies, a seller’s market is when the demand for properties far exceeds the number of those available for purchase. Per contra, a buyer’s market is dominated by many homes with a few people actually buying anything.
Obviously, you’d want to sell the property when the market conditions are more favourable for sellers.
There are certain times of the year when the demand for homes skyrockets, leading to better selling prices. However, just because you can sell the property doesn’t mean that you’ll get the maximum value out of it.
For example, spring and autumn are the best periods to sell a house in the UK if you want to make a speedy sale, particularly in the months between March and June and the September-October period. However, other factors like market conditions will determine the ultimate value of the property. For more reading, there is some great data on housing from the UKs Office for National Statistics here.
If a limited number of houses are available for sale in your region, then your chances of securing a better deal will increase. However, this one requires some effort from your end since you need to scan the region for unoccupied houses and those currently on sale.
5. Understand Your Debt-to-Income Ratio
Being aware of your current debt-to-income ratio is crucial when deciding whether you should opt for a bridging loan in the first place. This is because lenders pay close attention to this ratio when evaluating your eligibility for a bridging loan.
The debt-to-income ratio is simply a per cent that represents how much debt you have relative to your monthly income. To calculate it, all you have to do is divide your monthly debt payments by your total monthly income.
Ideally, your debt-to-income ratio should be as low as possible. Placing it somewhere between 20 and 40% would be a good starting point.
Before getting a bridging loan, take a moment to think about the other debts and commitments you have on your plate at the moment. How will a bridging loan affect your ability to pay for the other commitments?
Write down your current monthly expenses and your gross income to get an estimate of whether you can afford a bridging loan or not.
6. Plan Your Exit Strategies
Planning out an exit strategy before applying for a bridging loan is a crucial step that must be carefully considered. Remember that a bridging loan is a short-term solution, meaning that you won’t have enough time to weigh your options during the tenure.
Here’s a quick summary of the exit strategies that you can use:
Sale of the Property
The easiest way to get out of a bridging loan is to sell the property you provided as collateral. To ensure that the property is sold as quickly as possible, the lender might require that the property is on sale before or during the loan term starts.
Sometimes, the lender may ask the borrower to provide updates about the current marketing conditions of the property.
Selling Other Investments
If you’re having a hard time selling your current property, you might want to consider selling your other investments to exit the bridging loan. Properties like cars, boats, or antiques can all be good options for you. Alternatively, you can sell some of your stocks.
Selling Another Property
Selling a different property than the one you used to set up the bridging loan is another way to settle a bridging loan. It’s a bit complicated, but it works. Using this method means that the lender will have little to no control over the sale of the property.
That’s why many lenders will add a condition in the contract which states that the lender will get a percentage of the total selling price in case the borrower decides to settle the loan by the sale of a secondary property.
Some lenders also require agents to provide them with updates about the current status of the secondary property.
Refinancing to a mortgage is another way to exit a bridging loan, despite being a bit time-consuming. To refinance to a mortgage, you need to provide proof to the lender that you meet the other lender’s eligibility prerequisites.
This can be done by either providing documents of pre-approval or sending the criteria of the lender along with the documents that ensure you meet them.
One less common way to settle a bridging loan is inheritance. If you’re in the process of finishing the required legal documents to inherit an amount of money, you can provide proof to the lender that you’ll receive the inheritance funds within the loan’s tenure.
7. Be Realistic When It Comes to the Loan’s Tenure
You might be tempted to opt for the shortest possible term to free yourself of the debt burden earlier. However, if you don’t have a plan for exactly when you’ll be able to repay the loan, don’t underestimate the loan’s tenure.
Opting for an open bridging loan would be your safest bet, but prepare yourself to pay the high interest fees associated with them. That’s not the only solution, though; you can still score a closed bridging loan, but with a more realistic due date that has a safety margin of at least one month.
How Easy Is It to Get a Bridging Loan?
Getting a bridging loan shouldn’t be that difficult, provided that you have a good credit history and maintain a solid debt-to-income ratio.
You might want to consider improving both of these factors before applying for a bridging loan. But since bridging loans are meant to be quick, you can try your luck and see if you can get the loan.
Can I Get a Bridging Loan Without a Credit Check?
Getting a bridging loan without a credit check is almost impossible. Unlike other types of loans, bridging loans require thorough credit checks before approval. You can increase your chances of getting approved by improving your credit score.
However, credit history isn’t the only criterion used in evaluating your eligibility for a bridging loan, which is why you might still be able to get a bridging loan without having a great credit score.
For example, when the lender is assessing your loan application, they’ll take into consideration the exit route you chose or the security of the property. The deposit you cash out can play a major role, too.
Are Bridging Loans Regulated?
Yes, bridging loans are regulated. A bridging loan is secured against a property that you’re occupying or at least planning to. There are two ways to regulate a bridging loan: the first charge and the second charge.
There are some exceptions, though. For instance, if the bridging loan is linked to commercial buy-to-let properties, it won’t likely be regulated.
What Is the Difference Between Closed and Open Bridging Loans?
Closed bridging loans have a preset due date on which you need to repay the loan in full. Such loans can be a good option for those who are almost certain of how they’ll repay the loan.
On the other side of the coin, open bridging loans have a repayment period within which you need to repay them. A common term for an open bridging loan is 6 to 12 months. Open bridging loans are more flexible compared to closed ones.
It’s also worth mentioning that closed bridging loans have lower interest rates than open ones.
Do I Need a Deposit to Get a Bridging Loan?
A deposit isn’t a mandatory requirement for you to get a bridging loan. However, it can help you get a loan of up to 100% of the property’s value. Otherwise, the money you borrow could be limited to, say, 90%, especially if there aren’t any other security guarantees.
How Long Does It Take to Get a Bridging Loan Approved?
Getting approved for a bridging loan takes anywhere from a couple of days all the way up to 14 days. But, typically, you should get the funds transferred within a few days once approved.
Are There Any Alternatives to Bridging Finance?
Contrary to popular belief, a bridging loan isn’t your only option when it comes to acquiring quick funds. Of course, you can always opt for some form of unsecured borrowing, like credit cards and personal loans. However, these are usually much smaller in value than bridging loans.
You can also go for a residential or commercial mortgage. Unlike bridging loans, a mortgage is a long-term solution, with tenures spanning from 5 to 20 years. The downside of a mortgage is that you’re going to be in debt for a pretty long time. However, you’re free to sell the property and settle the mortgage whenever you think you no longer need it.
To sum it all up, a bridging loan can be a feasible solution if you’re anticipating that your property will be sold in the near future.
But remember, taking out a bridging loan is only a good idea when you’re certain that things will get better financially down the line. Otherwise, a bridging loan will simply set you back even further.