Bridging loans are amongst the strongest tools at your disposal. They are designed to help you make major purchases, but they are most commonly used for the purposes of buying property. Using a bridging loan can be an excellent way to finance a property purchase when you are moving from one property to another, but get this wrong and you risk ruining your finances permanently.
If you want to learn how to use these loans correctly, keep reading.
At a Glance
One look at a bridging loan and it’s easy to see that the goal is to create a cash bridge. This cash bridge is designed to tie you over until you can use another form of finance. This other type of finance will be used to pay back the original bridging loan, thus ending the financial arrangement.
It sounds simple, but it is far more complicated than this. It is not an option to use lightly. These flexible short-term loans are always secured against your property, so if you fail to pay back the loan, you risk losing everything you’ve worked for. The risk of this happening isn’t as remote as you might think.
Using them in the Right Way
Bridging loans are only used to finance the purchase of a property. There are other ways you can use them, but we are not going to go into that here because using them in any other way is far riskier and not recommended for anyone who does not possess an advanced knowledge of this topic.
You will most commonly use these loans to downsize from one property to the next. The reason for this is that you can use a bridging loan to finance your new property purchase before your initial home has been sold. It prevents you from getting trapped in one particular property.
Who Uses Them?
Property developers have made bridging loans popular in recent years. They have used them for broken chains, renovations, and auction purchases. The flexibility of these loans means that you can apply for as little money as £50,000.
You do not need a lot of money to get started with this because an existing property secures the loan. The only limit on your borrowing is that which comes from the value of your existing property. The bigger the downsize, for example, the more money you can claim.
Taking a Time Sensitive Opportunity
But you may not be looking to simply downsize. You may be looking to benefit from a purchasing opportunity that’s sensitive to time. A bridging loan provides you with a chance to secure that money before opportunity vanishes.
In this situation, you would apply to the bank for a loan to purchase the property. But at the same time, you would take out a bridging loan that would allow you to essentially reserve that property right now. Bridging loans can be processed in as little as 48 hours, whereas a bank could take six months.
It is one of the reasons why we are proponents of this type of loan.
Choosing the Right Amount
You do not have to cover the entire amount of your property purchase using a bridging loan. Due to the potentially high penalties involved when missing a repayment, you should choose only the amount you need to complete the purchase, rather than trying to fund the entire purchase.
One clever trick to use is to try to fund the acquisition of a new property through a mortgage where you only need the deposit to secure it. In some cases, the banks will require you to have between £20,000 and £30,000 to serve as a deposit before they give you a mortgage. The fact you already own property does not matter.
A bridging loan to meet this deposit would allow you to secure the mortgage you need to complete the rest of the purchase. When you sell your property, you can then pay off the bridging loan and as much of the mortgage as you can. This tactic can also be used to purchase a larger property than the one you already own.
Beware the Interest Rates
The unfortunate dark side to bridging loans is that due to how quickly you can obtain the loan lenders believe they can charge high-interest rates. They can turn into lighter versions of payday loans if you start to miss payments. It does not take much to spiral steadily out of control when it comes to bridging loans because the interest can quickly build up, thus making it impossible for you actually to keep up with the repayments.
In order to ensure that you can meet the repayments on bridging loans, you should set up a direct debit with your bank account the moment your loan application is approved. This will ensure that the money is always taken out of your account before the deadline for each repayment elapses.
This will keep you free of trouble.
Pay Less Than You Think
Did you know that the interest rates that come with bridging loans are not as bad as you think?
Bridging loans can sometimes give a false impression of the interest rates you will have to pay. Interest rates are nearly always calculated based on an annual rate. But a bridging loan will only ever last for a few months, assuming you make the repayments on time.
Understanding this fact about bridging loans can mean that you find yourself paying far less than you originally thought.
Are Bridging Loans Right for You?
Now you have to decide whether a bridging loan is right for you. The truth is that they are right for anyone who is confident that they can make the repayments. If you have inspected your finances and understood that making the repayments will not be a problem, feel free to apply for one of these loans.
They can be extremely useful as financial mechanisms, so take a look at how you can use them for the benefit of your next property purchase today.