How to Secure a Bridging Loan for a House Purchase
A concise guide to the uses and costs of bridging loans, and cases where you may find it useful to secure one before making a high-value purchase.
When searching for your dream home, you will often require a large amount of money to ensure a quick purchase.
If, for example, you intend to move to a new house and have found the home you want at a bargain price, but your current home is not selling as fast as you would have liked and you don’t have the deposit for the new purchase until the existing home sells. This can put you in a sticky situation, and you are likely to lose the house to another buyer unless you can find the money quickly.
So, what can you do? If friends and family are not an option, the answer is to get a loan. You can try to go to the bank for the loan, but the process may take weeks due to the red tape. Another solution is getting a bridging loan.
Hanan Shapira, director of Property Finance Partners says “bridging loans in the last few years have begun to be more popular for homeowners looking to purchase a new residential property.”
What are they and how do they work?
Bridging loans are specialised short term finance, typically acquired for between 3 months to 12 months. One of their advantages is the speed at which an application is processed. One can go from applying for a loan to money in the bank in as little as a week.
To get a bridging loan, you will have to have a property to be put up as security against the loan. You can borrow up to 80% loan to value (LTV) on the equity within your property.
Bridging loans are specialised short term finance, typically acquired for between 3 months to 12 months.
There are many uses of bridging finance such as developments, buying a property at an auction, buying uninhabitable properties or properties that require refurbishment for businesses and for buying residential homes.
How does it work for buying a home?
When you obtain the loan, you can use the money to put down a deposit for the new home, and then once your existing home is sold, you can then repay the loan. This is known as “bridging the gap.” It is a common use of bridging loans and works well in the right scenarios.
Regulated vs unregulated bridging loans
If the security offered is your current residence, the loan is automatically a “regulated” bridging loan. That means the loan is regulated by the FCA (Financial Conduct Authority). Regulated loans carry an extra level of protection; consumers are protected under the MCOB(Mortgage Code of Business) rules.
If the bridging loan is obtained against commercial property, it is likely to be unregulated.
Where can I get a bridging loan?
Your first thought may be from the bank, but the majority of high street lenders don’t offer bridging loans. The banks discontinued offering bridging loans after the crash in 2007-08, due to stricter regulations on unregulated home loans.
There are specialist lenders who provide bridging loans in the market, made up of hard money lenders and private funds. You will need to approach one of these lenders and package an application to them.
Costs of bridging loans.
Something to take into consideration is the costs involved in bridging finance. Relevant fees are broken down below:
- Interest Rates – Bridging loans carry an interest rate from 0.30% – 1.5% per month.
- Valuation Fees – You are likely to pay a valuation fee of about £700 on a £500,000 property.
- Arrangement Fee – The arrangement fee can be 1% – 2% of the loan amount.
- Legal Costs – You will levy the bill for your legal fees as well as the lenders
- Administration Costs – In some cases, you may have to pay an admin fee; it depends on the lender.
- Exit Fees – There may also be an exit fee involved, again this depends on who you are getting the loan from.
The bridging loan market is quite a competitive currently in the UK, which has lowered interest fees considerably. It is advisable to find a few lenders and to check what they have to offer.
One way of saving you time and money is to use a broker. A broker can package your application in the right way as well as find you the best deal in the market, as they will have access to many lenders.