If you need to borrow money for a little time, a bridging loan (sometimes known as a “bridge loan”) may be helpful. If you want to buy a new house before selling your old one, it can assist to “bridging the gap. We describe the everything you need to about bridging loans in this tutorial, along with potential borrowers.
What is a bridging loan?
A bridge loan is a brief loan taken out before someone or something pays off an existing debt or finds permanent financing. By supplying rapid cash flow, it enables the borrower to pay down current debts. Bridge loans typically feature quite high interest rates. They are secured by some kind of collateral, like real estate or a company’s inventory. Unemployed citizens in South Africa can also apply for bridging loans to alleviate their financial constraints.
How does a bridging loan work?
Bridge loans, often referred to as interim financing, gap financing, or swing loans, fill the gap when financing is required but not yet available. Bridge loans are used by both individuals and businesses, and lenders can tailor these loans for a variety of circumstances.
There are two types of bridging loan: ‘closed’ and ‘open’.
The Closed
A closed loan has a set due date and is typically provided to borrowers who have exchanged contracts but are still awaiting the closing of their property sale.
The Open
An open loan has no set due date, but you are typically required to pay it back within a year.
Regardless of the type of loan you take out, the lender will look for evidence of a clear repayment plan. Spme of this plan include utilizing the proceeds from the sale of a home as equity or getting a mortgage.
They’ll also demand documentation of the new property you’re buying, the sum you intend to pay for it, and, if applicable, evidence of your efforts to sell your current property.
Additionally, you want to have a fallback strategy in place in case your repayment plan doesn’t work.
What are first and second-charge bridging loans?
Your property will be “charged” when you take out a bridging loan. This is a contract that specifies which lenders will be paid back first in the event that you are unable to make your loan payments.
Your property is used as security for both first and second charge bridging loans in the event that you are unable to make payments.
You will be “charged” when you obtain a bridging loan on your property. In the event that you are unable to repay your loan installments, this contract details which lenders would be repaid first.
In the event that you are unable to make payments, both first charge and second charge bridging loans are secured by your property.
What are the bridge loans requirements?
Just as there are requirements for other types of loans, bridge loans have requirements too. However, the requirements for bridge loans can differ from one financial institution to the other.
The following are the common requirements:
- The lenders will find out whether you can afford to make multiple loan payments.
- An equity of 20% minimum in your home must be in place.
- How fast will your home sell? Is also important.
- You show that you’ve handled debt responsibly in the past (excellent credit history).
- Show a breakdown of how you intend to use the loan.
- Your resume, showing a track record of creditworthiness, will increase your chances of getting a bridge loan.
How much does a bridging loan cost?
Bridging loans include monthly rates rather than annual rates because most borrowers only keep them for a brief time.
A bridging loan’s high cost is one of its main drawbacks; monthly fees of between 0.5% and 1.5% are very uncommon.
They are therefore much more expensive than a typical residential mortgage. A bridging loan’s equivalent annual percentage rate (APR) ranges from 6.1% to 19.6%, which is much higher than the APR on most mortgages.
There are also set-up fees to consider, usually around 2% of the loan you want to take out, so it is advisable to only take a bridging loan out if you are confident that you won’t need it for a long period of time.
Read also: Where to get instant loans in South Africa.
How much can you borrow with a bridging loan?
Bridging loan providers may lend anything from £25,000 to over £25 million in cash. However, the maximum loan-to-value ratio (LTV) that you may typically obtain is for 75% of the value of your property.
You can normally borrow more money if you take out a first-charge loan than if you take out a second charge loan.
What are the alternatives to a bridging loan?
You might also think about a let-to-buy mortgage arrangement if you need to move but can’t sell your current home.
Remortgaging your current home onto a buy-to-let mortgage and using the equity released to purchase a new property are two ways to accomplish this.
What accomplishes a bridging loan?
One way to borrow money quickly is through bridging loans. If you need to purchase one property before selling another, they can be used to “bridge the gap.” Bridging loans, as opposed to mortgages, can be set up quickly if time is of the essence.
What are the cons of a bridging loan?
- Payments can increase. Bridge loan periods typically last between three and 18 months.
- If a future payment is delayed, it could be risky.
- Higher Interest Rates Than on Traditional Loans May Apply.
Why do people use bridging loans?
When you need to pay for something new while you wait for money to come in from the sale of something else, you utilize a bridging loan. They are frequently employed in real estate by buyers. Especially those who are holding off on making a purchase while awaiting the completion of the sale of another property. Bridge financing is a secured loan.
How quickly can I get a bridging loan?
How quickly you can get a bridging loan depends on a number of variables. The process might take anywhere from 72 hours to a few weeks. Due to its intricacy, it takes longer to get approved than other types of financing. Although lenders are frequently knowledgeable and quick to gather the data they want.
Conclusion
A bridging loan, also called a “bridge loan,” may be useful if you need to borrow money temporarily. It can help “bridge the gap” if you wish to buy a new home before selling your old one. In this tutorial, we go over the bridging loan process and potential borrowers.