If you are selling a property, you may be expecting a substantial sum of money to come your way. You might be fairly certain those funds will come along soon, but there’s a problem – you need them right now. You may need money to secure a purchase on a new property, to renovate a building or purchase a property at an auction.
These are the kinds of scenario where a bridging loan might be the best option for you. A bridging loan is basically a short-term loan, usually repayable within twelve months. The loan will be secured against a property such as a house or business premises.
Who uses bridging loans?
Bridging loans can be useful in many different situations. A homeowner may be selling a property, but requires funds to purchase a new home before the sale has gone through. These loans may be ideal for landlords investing in buy-to-let opportunities, or for business owners who need funds to improve or renovate a property with a view to selling it on at a higher value.
The exit plan
This will state how you are going to repay the loan, for example, in a lump sum following the sale of your property. These loans are based on a realistic prospect that you are going to be able to pay off the loan once your expected money materializes – for this reason they tend to be short term.
Some bridging loans will provide that you do not pay the interest on the loan until the final repayment date. The whole loan plus interest can then be paid in a single lump sum, such as when your expected money has arrived. The exit plan will be tailored to your needs and circumstances.
What are the risks?
If you are eligible for a bridging loan, it is important to get the right advice and make sure the loan meets your needs but does not carry unnecessary risks, and that you have a realistic prospect of being able to repay. Our advisors will help you make the best choices, avoid risks, and get the loan that works for you.
There may be instances when these risks develop into reality. Maybe the expected money doesn’t materialize or is later, or less fruitful, than you anticipated. If you find yourself unable to pay back the loan for some reason, the lender will need to recover their money from the sale of the property against the loan that was secured. Getting good advice based on an accurate assessment of your circumstances can minimize these risks.
First charge and second charge bridging loans
A first charge bridging loan is a loan secured on a property that does not have any existing charges, for example, a home owned outright with no mortgage or other secured loans. These loans are less risky because the lender is more certain to be able to recover the repayments. It also means that, for the borrower, they are usually cheaper.
A second charge bridging loan is a loan secured on a property that other lenders, typically mortgage providers, already have a charge. This means that any other lender with an existing charge on the property has first claim on the funds once the property is sold. A second charge bridging loan will typically be more expensive, as the lender stands more risk of being unable to recover the repayment. For example, once the mortgage provider has been paid, there may not be sufficient money left to cover the bridging loan.
Open and closed bridging loans
An open bridging loan is one that has no fixed repayment date, but can be paid off when your funds become available. However, most lenders will expect the debt to be repaid within a year or two. Open loans are generally appropriate when you are certain your money is coming, but cannot be sure about the date.
Closed loans do have a fixed repayment date. These are generally less expensive than open loans, and the date set will be based on a realistic assessment of when you will have your funds available for the repayment.
If you think a bridging loan may be suitable for you and you want to check both your eligibility and find out how much you can borrow, visit our bridging loans page and get in touch with us to talk through the options. At AJL Finance, we will always work to give you the best advice and ensure you get the product that suits your needs and your financial circumstances.
