Bridging loans are short-term property secured loans which are mainly used for property transactions. They are designed to cover a temporary shortage of credit, hence the term 'bridging'. In general, bridging loans are only taken out for a few months. In a situation where a property buyer needs to pay a down payment on a new mortgage before they have sold their existing home, a bridging mortgage could be suitable. Despite the fact that most bridging loans of this type are subject to the same regulation as mainstream mortgages, interest rates on bridging finance products tend to be higher than on traditional mortgages, and will be subject to arrangement fees.
Bridging loans can be much more expensive than mainstream mortgages as they are a short-term financing option, designed to assist borrowers who must have a clear exit strategy. The costs can range from 0.44%-1.5% per month, which could add up to anything between 5% & 18% per year, far more than most mortgages. So it pays to do a bridging loan comparison, particularly as rates can vary so much. You can also use bridging loan calculators to determine what your monthly payments would be based on the amount you wish to borrow.
As well as having higher interest rates, on bridging loans also very often have arrangement fees and you would have to pay both the lenders’ and your own legal costs.In some cases, the interest rate may be of less importance than the cost of the fees. Paying a higher interest rate in order to pay lower fees could be a smart decision in the long run. In general, the bridging companies’ interest rate will depend on the 'loan-to-value', i.e. the amount you are borrowing as a proportion of the property's value, so it pays to compare as many bridging lenders as possible before you make a decision and also make us of a Bridging loans calculator.
What are bridging loans used for? Bridging loans are typically used for house purchases. They are designed to assist home movers who wish to purchase a new home prior to having sold their existing home. When equity is tied up in an existing mortgage, bridging finance may be appropriate to fund a new property purchase.They can be especially useful for property developers, landlords and people who are purchasing property at auction. Home-movers may wish to use a bridging loan to cover a break in a property chain, so that they can purchase a new property while waiting for a new mortgage. However, it is important to remember that taking out a bridging loan does not guarantee that you will obtain a mortgage in the future.