Learning about Bridging Loans and Its Variations - Part 1

As the name may imply, the property loan known as the "bridging loan" is only intended to be a temporary fix. It helps you "bridge" toward a longer-term solution, whether that's a loan, mortgage, or releasing some money that's been restricted.

Let's take the scenario where you have decided to purchase a new home, but the sale of your current home still needs to be completed. When your old property is sold, you could switch to a regular mortgage and use a bridging loan to purchase a new home.

Property investors are also big fans of bridging loans. In the vein of Homes Under the Hammer, you may use a bridging loan for property development by using it to purchase a house at auction, renovate it, and then resell it for a profit.

How Does a Bridging Loan Work?

We're now getting down to business. What would happen if you submitted an application for a bridging loan? And what should you think about before applying for one?

First and foremost, keep in mind that there are two types of bridging loans: regulated and unregulated.

The distinction is whether your bridging loan has an end date that must be met (a regulated bridging loan) or whether it has no predetermined end date (an unregulated bridging loan).

How Does a Regulated Bridging Loan Work?

A regulated bridging loan can only be for 12 months. Regulated means you of a family member has either resided in the property or are going to reside in the property.

Let's imagine you've agreed to sell your current home, but the transaction has yet to fully go through, and you need to move on with buying your new house.

In essence, you are aware that the money is on its way to your bank account; it just hasn't done so yet. In these situations, a regulated bridging loan might be preferable since you'll be able to plan when you'll be able to repay the loan in full within the 12-month term.

How Does an Unregulated Bridging Loan Work?

Bridging loans that are not regulated are a little different. Let's say you must proceed with buying your new home, but the sale of your current residence still needs to be completed. 

Maybe you have yet to find a buyer, or your sale won't close on a specific date. In essence, you are still determining when the money will start to come in.

Unregulated bridging loans have a maximum length of 24 months. This could be for commercial or buy to let.

It is also important to note, if there is any residential part, it must be less than 40% of the floor area or the property.

Bridging Loan Interest Rates

At first appearance, the interest rates on bridging loans, which start at about 0.4% as of this writing, could appear to be quite low.

However, it's crucial to keep in mind that interest is calculated on a monthly basis rather than an annual one, as with typical mortgages. As a result, borrowing money with a bridging loan might be rather expensive, especially if you wait to pay it off immediately.

Consider borrowing £200,000 for a period of nine months at the cost of 1% per month. That may not seem like a high-interest rate, but over the course of the bridging loan, you will end up paying over £18,000 in interest, or about £2,000 per month.

Conclusion

Overall, bridging Loans can be a great option for short-term financing needs, but it's important to understand the different types and their associated risks before making a decision. It's also essential to work with a reputable broker who can help you find the best bridging loan for your specific situation.

If you are looking for a great bridging loan broker in the UK, look no further than our experts here at Property Link Homes. We provide mortgage advice, home insurance or buildings and contents insurance, as well as protection, including life insurance, income protection and critical illness cover. We are also a provider of bridging loans. Call us today, and let us discuss all your viable mortgage options.