How to get a bridging mortgage to buy a house in the UK
A bridging loan is a short-term way to borrow money and acts as a bridge between selling your existing property and purchasing another one. These types of loans can be acquired quickly and are helpful in a variety of situations.
This article will detail what a bridging mortgage is and answer some frequently asked questions.
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What is the purpose of a bridging loan or mortgage?
How do bridging loans work? A bridge loan is used when you need money and need it fast, typically for a property purchase.
They’re great for properties purchased at property auctions, where you have to make payment within a month. This makes using other forms of financing, such as getting a secured loan, inappropriate as it’ll take too long to acquire.
You could also try for a bridging loan if you’re buying a property considered unmortgageable. You can acquire bridging loans for properties that have been rejected for mortgage loans; as long as you have an exit strategy, it shouldn’t be a problem.
Finally, you can get a bridging loan if you plan on simply renovating and refurbishing the property you purchase and then selling it.
How do I get a bridge loan?
You can get bridging loans from various regulated lenders. We have access to over 400 UK lenders, meaning there’ll be no issue finding you a great deal, regardless of your circumstances.
Our lenders will likely require the following from you to borrow money:
- Your ID document.
- Your latest credit report.
- Proof of income.
- And evidence of your exit strategy.
Criteria for eligibility
To be eligible for a bridging loan, you’ll need to fulfill the criteria as set out by your lender; they’ll consider the following:
- The suitability of your exit strategy: a strong exit strategy could get you an excellent mortgage deal as the lender is assured that you’ll be able to make the payments.
- Your current credit rating: your credit rating is essential for any loan as the lender has to consider your reliability first.
- Your age and whether this is your first property: the younger you are, the harder it is to get any loan, as lenders need to know whether it’s risky to invest in you.
- Your financial situation means your lender will consider your income and expenses to assess your affordability.
Costs of bridging loans
There are considerable costs involved with bridging loans, such as:
Valuation fees: can be anywhere between £900 – £2000 depending on how quickly you need it done and which lender you choose.
Administration fees: these are typically paid up front.
Broker fees: will vary from broker to broker and are typically payable when you get the mortgage offer. This could either be a flat fee or a percentage of the loan.
Legal fees: these are also payable up front, like administration fees.
Arrangement fees: these are typically about 2% of the loan, but they’re not charged separately and are usually included in the cost of the loan itself.
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Typically, you’ll need to deposit anywhere between 25-35%, depending on the risk the lender is taking by granting you a loan.
Further, the greater the deposit you put in, the lower you may be able to get your interest rate, although this is subject to discussion with your lender.
In some cases, you might get 80-100% bridging finance, although you’ll have to put up further assets as security.
Bridging loan alternatives
There are several alternatives to bridging loans that are worth considering; these include the following:
If you’re getting a bridging loan to pay for your initial mortgage, i.e. piling debt on top of debt, why not remortgage your property?
Remortgaging is when you move your current mortgage to a different lender, completely replacing the old one. Remortgaging will also give you access to money, which may be vital if you need cash to cover the debt.
Additionally, a remortgage can help you get a better interest rate, reduce your monthly payments, and decrease the time it’ll take to pay back.
You could get a new guarantor mortgage, rather than a bridging loan, with the help of a guarantor, who’ll take on the risk for you. So should you forfeit your payments, they risk losing assets or even their property: that’s the major disadvantage of this type of loan.
Guarantors, although typically family members such as parents or a spouse, can also be friends or colleagues.
This loan is much like a secured loan in that lenders require security before lending to you.
A second-charge loan is secured on the equity you have on your property. Although risky because failure to make the payments for this mortgage will result in you losing your property, it can come in handy and is a long-term solution, unlike a bridging loan where lenders expect you to be able to pay it off in just a few months to a year.
Buy-to-let mortgages, like bridging mortgages, can be arranged quickly and are much more cost-effective. However, the time it takes will vary from lender to lender.
You can purchase a new property with a buy-to-let mortgage only if you are buying to let.
These are unique in that individuals invest their money into a platform other than a building society or bank. These loans are, however, regulated by the Financial Conduct Authority. These loans occur when people lend money between themselves as “peers.”
Instead of a bridging loan, consider getting yourself a personal loan. The upside of this option is that, unlike loans secured on your new property or another asset, you don’t risk losing anything.
However, you still have to make your monthly payments, and failure to do so can accrue penalties and severely damage your credit score. A bad credit score can affect your ability to get mortgages in future.
Consult with your existing lender
If you’re taking out another loan because you’re struggling to afford your current mortgage, then instead of piling new debt on top of old, you can discuss new terms with your lender so that you can afford the mortgage. For example, your lender might decide to extend the period of your repayments.
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Pros and cons of bridging mortgages
There are various upsides and downsides to bridging mortgages, and considering them is an essential step towards deciding whether you want to get bridging finance or want to consider one of the alternatives we’ve already mentioned.
Bridging finance boasts the following benefits:
- You can lend a lot of money quickly.
- You can get flexible repayment terms.
- You can get lending for properties where many lenders won’t help you.
Regrettably, bridging loans have these downsides:
- They have a pretty large number of fees.
- They boast high interest rates because you’re getting fast finance.
- You’ll need to risk putting an asset up against the loan and potentially losing it.
Closed vs open bridging mortgages
There are two kinds of bridging loans: closed bridging loans and open bridging loans.
With closed bridging loans, you get a fixed repayment date, typically within the next few months. This is a good option if you know you’ll have the money needed within the time frame.
Alternatively, there are open bridging loans in which, although there’s no set date for repayment, terms typically don’t last much longer than a year. This is a better option if you’re still determining whether you’ll have the money needed due to variables out of your control. Because of this added flexibility, these loans have higher interest rates.
Fixed vs variable rate bridging mortgages
Fixed-rate bridging loans, like regular fixed-rate mortgages, are when the interest rate remains the same throughout the loan. Variable rate bridging mortgages, on the other hand, are subject to changes as they follow the rate of the Bank of England.
Can I take out a first charge bridging loan?
You can take out a first-charge bridging loan. These mortgages are defined as the first mortgage you take on a property.
However, typically bridging loans are second-charge debt on top of a pre-existing mortgage.
Making the right choice
Although we’ll help you decide on the right lender for your bridging loan, comparing bridging loans requires that you look at their respective interest rates and all the fees you’ll have to pay.
Considering these variables is essential when contemplating getting yourself a bridging loan.
What are the cons of a bridging loan?
Unfortunately, only some people are good candidates for a bridging loan, although it would help if you had a decently high level of equity in your property. In addition, bridging loans often have high-interest rates and must be paid off quickly, typically after a few months.
Do I need proof of income for a bridging loan?
Proof of income is usually not needed for bridging loans as there aren’t typically monthly interest payments, which are only paid when the loan is cleared.
What are the benefits of a bridging loan?
Bridging loans can be arranged speedily, which comes in handy when you need quick cash. In addition, bridging loans have no monthly repayments and are often very flexible, boasting interest rates that are suited to your circumstances.
How much money do you need for bridging finance?
With bridging loans, you’ll need to deposit at least 25% and up to 40% to get better interest rates. This can become extremely expensive, depending on the value of your property.
Are bridging loans high-risk?
Bridging loans are high-risk for the borrower because they need to be paid back in such a short amount of time and at high interest. Borrowers of closed bridging loans have to have a good exit strategy.
Can I get a bridging loan with bad credit?
It’s possible to get a bridging loan with bad credit; however, it’ll be a challenge. People with bad credit may find it hard to be approved for a bridging loan, and if they do get approved, the interest rate they get will be high as lenders are taking more risk with them.
Want to get yourself a bridging loan?
If you’re interested in applying for a bridging loan, contact us, and we’ll be able to assist you with sound advice and a large panel of lenders. Call us at 0808 301 9509 or fill out our form below so we can help you compare bridging loans and provide you with a quote.