Bridging loans can be used in a number of different ways, including by property developers and investors. However, they can also be useful for individual homeowners. Sometimes situations with selling and buying property arise for which traditional homeowner loans are not suitable. People who are buying a home in a hot property market may find one they want to purchase before the sale of their existing home is complete. In these circumstances, a bridging loan might be the right solution.
Choosing a Lender
Comparing lenders to get a good deal is important. First, try to look beyond the interest rate offered and consider the total cost, including fees. It is important to make sure the lender is transparent about all of these fees. A breakdown can help. The terms of the loan need to allow enough time to get cash flowing again. A mortgage broker will work on your behalf to find the lender with competitive rates and terms that best meet your needs.
Advantages and Disadvantages
Building societies and banks are increasingly reluctant to lend money since the financial crisis, and bridging lenders have stepped in to fill the gap that is left. There are other advantages to this type of loan. They are fast, with an application period that may be just 24 hours and the money available within a couple of weeks. It is possible to get a large amount of money, depending on how much the property used as security is worth. Flexible borrowing might be allowed.
However, there are some drawbacks as well. There are significant fees associated with this type of loan, and this can make it particularly costly. Some who are unable to make payments could lose their home since this is used as security. There can also be high interest rates although the competitive nature of the industry may drive them lower at times. Financial experts generally advise proceeding with caution for these reasons. In general, these are an excellent option for borrowers who have valuable assets but temporary cash flow issues.
Types of Bridging Loans
A bridging loan may be open or closed. A closed one means the borrower has to show how the debt will be repaid. The repayment period is generally just a few months or even weeks. For an open one, there is usually a year to repay the debt although some go as long as 18 months. Borrowers are not required to demonstrate exactly how they will make the repayment. However, borrowers may pay more for the flexibility offered. There are other variations as well. For example, the interest rate may be fixed or variable.
Eligibility
Lenders will differ in their requirements, but there are a few factors they will take into account. Some lenders require clients to use them for the new mortgage as well. Some lenders require proof of income but others do not because the interest is not necessarily paid monthly. Interest may be paid in full at an agreed-upon date. Since these are secured loans made against property, people may need to own more than one piece of property depending on how much money they are seeking to borrow.