Hardly a few years ago my wife and I were in the process of selling our home. We were sure we would find a buyer and agreed on an acceptable price for both of us and them but they would not be able to buy our house for about three months. My wife and I were totally fine with that as we were in no particular hurry to move, we just wanted to move out of town to a bigger house, somewhere a little more rural.
Well, one weekend while we were looking at homes in the countryside, we saw the perfect farmhouse. That’s exactly what we were looking for. Not far from the city, on a quiet road, a small lake and tall oak trees are visible all around. In short, it was perfect.
We contacted the sales agent and found that the price was within our budget, but only. We told him we would be able to buy it three months in advance and it gave him a break. Apparently, there was a lot of interest in that tiny house and he couldn’t justify the three-month delay in the sale. So let it go
Why Bridge Loan?
We found another beautiful house, so the story has a happy ending but what could we do to get that first one? The answer, if we knew it at the time, would be a bridging loan. Bridging loans are short-term loans given by commercial lenders to borrowers for a specific purpose. Commercial bridging loans can range from two weeks, for very short periods, to three years. Home buyers who have not yet sold their property and are willing to buy, need this bridging loan.
Rate of interest
The interest rate is probably higher than your average mortgage, but that’s because of your added flexibility and the convenience of the lender. There will also be a setup fee involved. However, they can be significantly cheaper than alternatives such as rental housing. There will also be situations where a price will have to be paid if it means getting the home of your dreams.
You should always shop around before agreeing to a bridging loan as rates and charges can vary greatly. You do not need to get it from your mortgage lender, even if it is convenient to do so.
Bridging Loans-The Essentials:-
What are the mechanisms of bridging loans and what should consumers be concerned about? The most commonly considered consideration for meeting loans is to ensure a payable rate, which ranges from .95% on the first fee to anything between 1.75% on the second fee and/or compounded rate. With the participation of the FSA, all charges will be clearly identified in the KFI (Key Features Picture). Of course, there will be a set fee for anything between 1 to 1.5% of the loan advance, however, the consumer should be advised and aware of any ‘exit’ charges. Which is generally ignored by consumers and homeowners and an important condition is having an identifiable way out of the contract.
Closed bridging finance is available to homeowners who have already exchanged their intended purchase of the property, should the exchange be completed once the pull-out case has occurred.
Open bridging finance is riskier for the homeowner and should not be taken lightly. This type of bridging usually occurs for homeowners who have found their ideal property but their sale takes a long time and/or has not found a buyer. Open bridging will usually attract an additional 1% more than closed bridging which will ensure higher risk. Lenders, as part of their underwriting criteria, will ensure that there is sufficient equity in the security assets. The lender will want to see a mortgage offer with evidence that your existing property is being actively marketed.
There are also several positive aspects to bridging finance while highlighting open bridging as a somewhat higher risk. There is usually no appraisal or legal fee as the legal work is usually done ‘in-house’. As consumers take over residential and commercial property auctions, bridging loans are also an ideal means of securing a property at auction, with hammer falls and exchanges typically taking 20 business days to go.
Looking at the broader picture and asset bridging comes with bankruptcy as well as “buying” loans that allow a consumer home and business to survive while improving cash flow. It is an ideal alternative to I.V.A (Individual Voluntary Arrangement) which interferes with the credit record for a significant period. In addition, the fees associated with I.V.A can be very significant and generally unreasonable unless there are multiple creditors.
Buy-to-invest and self-build projects also benefit from bridging finance. A buy-to-let property, where the property is deemed uninhabited or does not have a bathroom or toilet, can be subject to 100% retention. With a self-build project or development, funding is released in phases, with each phase being signed by the lender’s appointed architect, and then the funds are released.
Other examples may be when the trustee of a deceased estate is unable to receive probate due to unpaid taxes. The answer to bridging is if the asset does not have enough cash and the asset cannot be sold. The landlord can be released from possession even after getting the judgment. A common misconception is that homeowners once evicted have lost the opportunity to reclaim their homes. This is not because any mortgagee would like to get their money back as quickly as possible without the hassle of marketing. Use the Bridging Loan Calculator to calculate the current bridging loan finance monthly fee of first, second and compound rates.
Bridging Loans FAQ:-
What does a Bridging Loan do?
When you withdraw money from other assets/investments or secure a long-term financial plan, such as a mortgage to buy late. These are easy ways to access short-term cash injections when you establish a more sustainable plan or have liquid resources.
What are the disadvantages of a bridging loan?
Cons of bridging debt
1. High interest. The relatively high-interest rates associated with bridging Loans drive up the cost of borrowing in the long run.
2. Bail. It may be impossible to qualify for a bridging loan at first without sufficient equity to guarantee the loan.
Does the bank give a bridging loan?
Which bank offers a bridge loan? Many high street banks and private lenders offer bridging loans. Most of these are available only through loan brokers, as even high street banks generally do not offer bridge loans directly to the public.
Do You Make Monthly Payments for Bridging Loans?
Interest in bridging finance is quoted as a monthly rather than an annual rate. This rate isn’t meant to be hidden – because you can’t have a one-year short-term loan. And after the minimum period of the first month, the interest is calculated daily.