How Does A Bridge Loan Work?

USDA business loans

A bridge loan (or “bridging finance”) may be useful if you need to borrow money for a short time. It can assist in the “bridging of the gap” if you plan to buy a new property before selling your current one.

In this article, we’ll explain what a bridge loan is and why they might be suitable for certain individuals.

How do bridging loans work?

The two most frequent types of bridging loan are ‘closed’ and ‘open.’

Closed bridging loans

With a closed loan, you must make payments according to the term of your loan – if you have exchanged contracts but are waiting for your property sale to finalise, you will most likely receive this sort of loan.

Open bridging loans

There is no set repayment date for an open loan, but you will be expected to pay it off within a year.

The lender will want to see evidence that you have a working repayment plan in place, such as the sale of equity from a house or the taking out of a mortgage. They’ll want to see evidence of the property you’re buying and the price you intend to pay for it, as well as proof of what you’re doing to sell your current property if relevant.

First and second-charge bridging loans

When you take out a bridging loan, your home will be assessed and a “charge” will be placed on it. This is a legal agreement that determines which creditors get repaid first in the event you do not pay your debts.

In the event of default, a first and second charge bridging loan will take your home as collateral.

If you still have a mortgage on your property, the bridging loan will be a second charge loan, which means that if you missed payments and sold your property to pay off your debts, your mortgage would be paid before yours.

If you owned your property outright, or were taking out a bridging loan to pay off your mortgage in full, you would be offered a first charge bridging loan. This means that if you fell behind with payments, the bridging loan would be paid back before anything else was repaid.

Bridging loan costs

Because borrowers take out bridging loans for a short time, they’re generally priced monthly rather than annually.

One of the most significant drawbacks regarding a bridging loan is that it tends to be rather costly: monthly costs might range from 0.5% to 1.5%. Because of this, they are far more expensive than a regular home mortgage. The comparable yearly percentage rate (APR) on a bridging loan is between 6.1% and 19.6%, which is significantly higher than many mortgages.

There are also set-up fees to consider, often around 2% of the loan you wish to borrow, so it’s best to just take out a bridging loan if you’re certain you won’t need it for a long time.

Borrowing with bridging loans

In terms of cash, bridging lenders like Finbri can offer anything between £25,000 and £25 million. If you get a first-charge loan, you can usually borrow more than if you took out a second charge loan.

Alternative options

If you need to relocate but don’t want to sell your house, a let-to-buy mortgage agreement may be an option for you. You can do this by remortgaging your present property and using the equity freed up to acquire a new home.

About Carson Derrow

My name is Carson Derrow I'm an entrepreneur, professional blogger, and marketer from Arkansas. I've been writing for startups and small businesses since 2012. I share the latest business news, tools, resources, and marketing tips to help startups and small businesses to grow their business.