8 Things To Know About Bridging Loans
For some people, selling their current home would be necessary in order to purchase a new one. This is due to the fact that they would require the profits from the sale of their current residence to pay for the house they wish to buy. However, selling a house can take time, and the owners may need to vacate their present home to allow prospective buyers to inspect it.
If you find yourself in a similar circumstance, a bridging loan from a Bridging Finance company will be helpful if you don’t have enough cash reserves in your pocket for the impending purchase. In other words, you can borrow money to purchase a new home and promise to repay the cash once you successfully sell the current one. With that elaborate illustration, below are eight things you should know about bridging loans.
1. Reasons To Use Bridging Loans
Bridging loans aren’t limited to the above scenarios. Aside from financing the purchase of a new home when selling the current one, you can also use bridging loans for the following reasons:
To renovate and upgrade your property before selling or renting it out
To purchase an auctioned property, where cash is needed on the spot
To launch a property development project
To buy rental units
To settle a divorce that involves property
To pay tax debts through a property sale
As you can see, bridging loans are generally used to fill gaps in property chains.
2. Interest Rates
The interest rate on loans is among the first questions applicants ask. Generally, bridging loans have higher interest rates than conventional loans because of the risks involved.
Remember, there’s never a guarantee that your current home will sell quickly, which could result in payment default. Lenders protect themselves by charging higher interest rates. But even so, interest rates differ from lender to lender, and it’d be wise to search for the most affordable providers. You may want to check out firms like Novellus Ireland or similar ones as a starting point.
3. Open Vs. Closed Bridging Loans
Bridging loans typically take two forms: open and closed. Open bridging loans don’t have a definite payment period. It’s an excellent option if you’re uncertain when you’ll finalize your current home’s sale. Legal holds may also arise during the property transfer, forcing you to wait longer for the cash. Nevertheless, you must provide the lender with a clear-cut repayment plan, only that they’ll be flexible when unforeseen delays arise. Open bridging loans attract higher interest rates because of the increased risks.
On the other hand, closed bridging loans have a set date for full payment. You’d want to go with this option if you already have a willing buyer for your property and have agreed on the closing date. Closed bridging loans typically have lower interest rates than open bridging loans.
4. Repayment Period
Bridging loans are primarily short-term. In most cases, the maximum repayment period is 12 months. However, some firms are flexible beyond this universal cap, allowing you more time to clear the loan. On the minimum end, you can take bridging loans for just a few weeks and avoid the cumulative interest rates.
5. First Versus Second Charge Bridging Loans
A first charge loan is the first bridging loan secured against your property. Should you need to use the same property as collateral for another bridging loan, it’ll be termed a second charge loan. It attracts higher interest rates than the first charge loan because of the risks involved.
6. Loan To Value Ratio
Generally, bridging loans follow a maximum loan to value ratio of 75%. That means if your current property is valued at USD$100,000, the maximum you can borrow is USD$75,000. Lenders typically don’t give loans precisely equal to your property’s value to shield themselves from uncertainties that may result in its price dropping.
7. Associated Fees
Bridging loans aren’t free of fees, just like traditional loans. It pays to be aware of the typical fees you’ll incur, as outlined below:
Administration fees
Solicitor fees
Arrangement fees
Legal fees
Valuation fees
Redemption fees
These fees vary from bank to bank, so you may not have to incur all, depending on your lender’s policies.
8. Required Documentation
You need the following information when applying for a bridging loan:
Utility bills or bank statements from the past three months as proof of address
A valid driving license or passport as proof of ID
A fully completed application form
Personal and business bank statements covering recent months
Proof of income, such as pay stubs
Your credit score may not come into play when seeking a bridging loan because the lender uses your property as security without basing their approval decision on your past financial behavior.
Conclusion
Bridging loans are necessary when you want to transfer property and acquire a new one seamlessly. With the above insights, you now know what bridging loans entail. Whenever you need one, seek reliable lenders with affordable rates and a positive reputation, so you can enjoy the property transfer process.
