Question 1

What is a bridging loan?

Accepted Answer

A bridging loan is a short term, secured loan that lets you borrow larger amounts of money quickly. They are typically used for deposits, renovations or buying property at auction. Bridging loans can be arranged much quicker than a typical mortgage, and are usually available with repayment periods up to 18 months. This makes them ideal if you need to raise a deposit for a new home before you’ve been able to sell your current one. It also makes them ideal for buying property at auction when you don’t have enough time to finalise a mortgage before the purchase deadline. They can also be ideal for covering the cost of renovating a property before selling it to make your money back.

Question 2

Do you need a bridging loan?

Accepted Answer

Bridging loans are short-term secured loans that allow you to borrow large amounts of money at short notice.They are perfect if you need to raise the deposit for your new home before selling your current one. They are also ideal for funding property renovations and buying property at auction.

Question 3

How does a bridging loan work?

Accepted Answer

Bridging loans are secured against a property. This lets you borrow more money over a shorter period, but means you could lose the property if you don’t repay the loan.Bridging loans require an asset to be used as security. The asset needs to be worth enough to cover the amount you want to borrow. Most loans are secured against a property, as they are generally of a high enough value to cover the amount of credit required. Providing security against the loan gives lenders more confidence in the borrower, which allows you to borrow larger amounts of money over shorter periods. Lenders will need proof that you have a plan for repaying the loan, known as an exit strategy. It is essential to ensure that you can have a viable exit strategy, as your property / home may be repossessed if you do not repay the loan.

Question 4

What can a bridging loan be used for?

Accepted Answer

Bridging loans can be used for anything you like, but they are usually used as house deposits, funding property renovations and buying property at auction. A bridging loan is a highly versatile form of finance that can be used for a variety of purposes (as long as it’s legal!). Property investors often use bridging finance when purchasing a property at auction. Often these need to be paid for within a certain period of time which is too short to arrange a buy to let mortgage. Bridging finance allows the buyer to cover the purchase cost until they can arrange a buy to let mortgage. Bridging loans can also be used to cover the cost of both light and heavy property refurbishments. This covers everything from decoration through to extensions with the owner typically refinancing the property with a buy to let mortgage to pay off the bridging loan when the works are completed. You could also use a bridging loan as the deposit on a new home. For many people, a deposit for a new home is tied up in their current property. This means they need to sell their current home to release the equity they need for a deposit - and by the time the sale goes through, their next home has been lost. A bridging loan is ideal for filling this gap between sale and purchase.

Question 5

What are the advantages and disadvantages of a bridging loan?

Accepted Answer

Bridging loans are quicker to arrange, and let you borrow larger amount of money over short periods without paying additional fees. However, they use a property as security, so there is a risk of repossession if you don’t repay the loan. Bridging loans have many advantages when compared to other forms of finance. Longer term financial agreements like mortgages can be too slow to arrange, and are usually repaid over longer periods of time. In most cases, you will also be charged additional fees if you repay them early. So if you only need to borrow money for a short time, a bridging loan is often the cheapest way to do it. The criteria needed to get a bridging loan also tends to be less extensive than other forms of finance, this makes them ideal for purchases that are time sensitive such as buying property at auction. However, bridging loans are secured against your property. This means that it is at risk of being repossessed if you are unable to keep up with repayments. The flexibility and swift availability of funds mean that the interest rates that accompany the product can often be higher. These two facts combined mean that you must have a viable exit strategy in place before taking out the finance. Advantages of a bridging loan: Quicker and easier to arrange Borrow larger amounts of money Repaid for a short period of time No early repayment fees Disadvantages of a bridging loan: Uses security (risk of repossession if not repaid) Exit / repayment strategy required in advance May have higher interest rates

Question 6

How much can you borrow using a bridging loan?

Accepted Answer

This will vary from lender to lender and will depend on your circumstances and your ability to repay the loan. Bridging loans let you borrow larger amounts of money. The exact amount you will be able to borrow will depend on things such as: the amount of equity in your security your financial circumstances the affordability of the loan your exit strategy i.e. how you plan to repay the loan. As with other types of finance, the lower LTV you choose to borrow at (i.e. the more deposit you provide yourself), the less you’ll need to borrow. This will reduce the overall cost of the loan as the lender will be taking on less risk.

Question 7

What are the interest rates on a bridging loan?

Accepted Answer

A bridging loan is typically more expensive per month than a mortgage. This is because they offer the benefit of borrowing larger amounts of money quickly, as well as letting you repay them over short periods of time, without any penalty charges. Like any form of lending the interest rates are calculated on the risk of the finance not being paid back. To mitigate this risk bridging loan lenders ask you to have a feasible exit strategy when you take out the loan. This usually tends to be one of two things: You plan to sell the property and repay the loan from the proceeds. You plan to switch to a longer term form of finance, typically a mortgage. Bridging loan interest rates reflect the short term nature of the financial agreement, so may often be higher than some other forms of lending.

Question 8

How quickly can you get a bridging loan?

Accepted Answer

Bridging loans are far quicker to complete than some other forms of long-term borrowing, like mortgages. Many can be completed in just a few weeks. One of the main benefits of a bridging loan is how quickly you can borrow large amounts of money. Some mortgages can take months to complete, but a bridging loan can be completed in just a few weeks (sometimes even quicker depending on the situation). Because they are so fast, they are often used by people who want to buy or sell a property quickly. This can include people in a property sales “chain”, as well as property investors who don’t want to miss a bargain at auction while they arrange a mortgage. Bridging loans are also an excellent solution if you are renovating a property and need access to cash for a short period of time. It’s important to remember that the more complex the case, the longer it may take to complete. Also, the speed of completion will always depend on how quickly you provide any required information, or return any paperwork to the lender.

Question 9

Can you get a bridging loan if you have bad credit?

Accepted Answer

Yes. If you have a poor or bad credit profile you could still get a bridging loan. This type of loan uses your property as security against the amount you borrow. This means there is less risk for the lender so they are more likely to be flexible when considering any credit issues. There are a lot of lenders that won’t help you if you have less than perfect credit, but Mercantile Trust will. We consider all credit histories including those that have: Accounts in default CCJ’s (County Court Judgement) Missed payments Historic IVA (individual voluntary arrangement) which is now settled. The best way to find out whether you’ll be able to take out bridging finance if you have poor or adverse credit is to discuss your situation and needs with our friendly advisors.

Question 10

How much does a bridging loan cost?

Accepted Answer

The cost of a bridging loan will depend on how much you borrow, how long for and the interest rate. Just like any loan, the more you borrow, the more you will need to repay. The interest rate you pay will also dictate the cost of your loan. Special types of loan, such as bridging loans, sometimes have higher costs than other types of loan (e.g. a mortgage). This is because they offer specialist benefits such as short repayment terms and fast completion times. In addition to the interest charges, there are several other elements to take into account such as valuation fees, exit fees and solicitor fees.

Question 11

What are first and second charge bridging loans?

Accepted Answer

First Charge means that it is the most important debt secured against your house. Second Charge means there is already a more important debt against it, usually a mortgage. A first charge loan means that it is the first priority for repayment, should you fail to repay it and the asset used as security is taken in lieu. A second charge loan indicates that a higher priority, first charge loan is already secured against the asset / property (typically a mortgage), which should be repaid before the second charge loan, should the asset ever be repossessed. Typically, if you are using a bridging loan to fully repay an existing mortgage, the bridging loan will be considered as first charge, as the mortgage will have already been repaid, and no longer be using the property as security. Second charge bridging loans are required when you use a property as security to fund the purchase of additional property, but the existing mortgage remains in place on the property being used as security. If you are using the new property as security for the bridging loan, it will be considered as a first charge bridging loan, as no mortgage was in place at the time it was secured. It's important to note that if your loan uses both an existing and a new property as security, both could be at risk of repossession should you fail to repay the loan.

Question 12

What are the alternatives to a bridging loan?

Accepted Answer

It really depends on your needs and circumstances, but typical alternatives include secured loans. Although a bridging loan may provide the best option, when it comes to both speed and cost of short term borrowing, there may be a better alternative if these things are less important to you. If funds are required quickly by an investor to secure the purchase of a buy to let property that will be refinanced using a buy to let mortgage in the coming months as the exit strategy, it may be easier to wait to arrange a buy to let mortgage which may only take a few weeks.

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