What is a bridging loan? A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.
Most bridging loan providers require property as security. This could be just one property, or several. They will secure their loan by taking a charge over the property or properties. This is registered at land registry by way of a first charge, second charge or even a third charge.
Bridge loans are secured by your current home as collateral, just like mortgages, home equity loans and HELOCs. Bridge loans aren't a substitute for a mortgage, however. Bridge loans are short-term, designed to be repaid within six months to three years.
Bridge loans are one area where investors are likely to find consistent low risk and high rewards compared to similar investments offering a fixed income. Simply put, bridge loans are used for commercial real estate when more traditional institutional financing sources may not be available.
You can take a bridge loan and use your old house as collateral for the loan. The proceeds can then be used to pay a down payment for the new house and cover the costs of the loan. In most cases, the lender will offer a bridge loan worth approximately 80% of the combined value of both houses.
However, borrowers usually doesn't need to pay interest in remaining months if their home is sold before the term of the bridge loan is complete. But watch out for prepayment penalties that hit you if you pay the loan off too early!
Bridge loans typically have interest rates between 8.5% and 10.5%, making them more expensive than traditional, long-term financing options. However, the application and underwriting process for bridge loans is generally faster than for traditional loans.
Bridge loans are a type of hard money loan. Also known as gap financing, interim financing, and swing loans, these short-term loans allow you to put a contingency-free offer on an investment property.
Bridge loan terms are typically six months but can range from 90 days to 12 months or longer. To qualify for a bridge loan, a firm sale agreement must be in place on your existing home.
Bridge loans are a form of short-term financing that can meet immediate cash flow needs during the time between a demand for cash and its availability. While this short-term loan is commonly used in business while waiting for long-term financing, individuals typically only use them in real estate transactions.
Not surprisingly, bridge loans usually feature higher interest rates, fees and penalties and require a large balloon payment at the end of the term.
There are two main types of bridging loan; a 'closed bridge' and an 'open bridge', and each have key differences says David Kinane, partner at Paxton Private Finance. A 'closed bridge' is a loan where, before the bridging loan is taken out, the borrower sets out a predefined and planned exit to repay the loan.
As they are short term, bridging loans usually charge monthly interest rates rather than an annual percentage rate (APR). This means that just a small difference in the interest rate can have a big impact on the overall cost of your bridge loan. But the interest's not always charged monthly.
In order to pay off your bridging loan, you could then choose to refinance onto a Buy to Let Secured loan, or you could choose to Remortgage.
No, the majority of bridging lenders do not require proof of income.
Many financial institutions will only extend a bridge loan if you also use them to obtain your new mortgage. You may own two houses for a time – and managing two mortgages at once can be stressful. Trouble selling your property can lead to future issues, or – in a worst-case scenario – even foreclosure.
Amortization. Bridge loans tend to be interest-only loans, with little to no principal amortization. Typically the entire principal is due at maturity. In addition, negative amortization and zero-coupon notes may be an option.
Credit Requirements
Since the sale of the current property will automatically pay off the bridge loan, the lender can be reasonably certain they will recoup the loan amount. A credit score of 650 and above should be easily approved by private money bridge lender.
Hard money loans are essentially a type of asset-based financing in which the borrower acquires funds that are secured by real property. It's called a “hard money” loan because it's harder to acquire and pay back than its soft money counterpart.
Good news. Interest on loans for the purchase or improvement of up to two residences is tax deductible, so it is likely that you can deduct the interest on both mortgages and the bridge loan. And property taxes are tax deductible on all properties that you own as well.
Expect an approval and funding timeframe of 30-45+ days from a conventional lender. A bridge loan from a hard money lender can be approved and funded very quickly, especially when compared to an average timeline of a conventional lender such as a bank or credit union.
Which banks offer bridge loans? A number of high street banks and private lenders offer bridging loans. Most of these are only available through loan brokers, as even high street banks do not normally offer bridge loans direct to the public.
Can homebuyer bridge loans be extended when they reach maturity? There cannot be any written agreement to extend the loan beyond the 12-month maturity limit. However, if lender and borrower both agree, the loan can be modified at maturity to provide an extension of up to 12 additional months.
Bridging loans are priced monthly, rather than annually, because people tend to take them out for a short period. One of the major downsides of a bridging loan is that they are quite expensive: you could face fees of between 0.5% and 1.5% per month. That makes them much pricier than a normal residential mortgage.
A bridging loan, unlike a mortgage, is not directly linked to your income. The bridging loan is repaid either by the sale of the property or by raising finance through a traditional mortgage route.