Bridge loans offer short term finance quickly. Often used for buying a property before long term funding becomes available. Hence the term ‘bridge’ or bridging the gap between lending sources. Typically, it means that home owners can buy their new property before selling their existing one. As well as buyers who are struggling to sell their existing home, these loans are also useful for those where the chain collapses or where there are ongoing renovations.
A bridging loan attracts much higher interest rates than a traditional mortgage, but this is not always the case. Recently we sourced a rate as low as 0.27% per month on an attractive LTV deal. Calculated in months rather than years, a bridging loan rate of 1.5% a month translates to an APR of 18%. There are also administration fees associated with bridge loans and a typical rate is 1%.
Just like standard mortgages, rates can be fixed or variable. A fixed rate gives the borrower some ‘peace of mind’ whereas a variable rate can fluctuate. Loans can be described as first or second charge. This simply denotes who has priority should you default on the repayment. For example, if you take a bridge loan to buy your next home, but you still have a mortgage on your existing home, your mortgage will be first charge. The bridging loan may then be second charge meaning it also takes your current home as security, but your mortgage will take priority for repayment if your home is repossessed. However, if the bridge loan is used to settle your existing mortgage it is registered as a first charge loan. Rates will vary depending on these variables.
There are two main types of bridging loans – open and closed. A closed bridge is available where contracts have been exchanged on their current property. An open bridge denotes a borrower who has found their perfect home but has yet to put their existing one on the market. Again rates will vary depending on the risk to the lender.
Be warned though. Bridge loans can be expensive and should only be used where the borrower had a clear exit strategy, otherwise they can become costly. Mainstream lenders are becoming warier of this type of lending since the financial crisis. Hence brokers must have a good network of lenders.