pro's & cons
when a bridging loan is a good idea, and when it is not.
Lets talk about Bridging Loans
A bridging loan is a type of short-term financing that is designed to bridge the gap between the purchase of a new property and the sale of an existing one. These loans are typically used by property developers, investors, and homebuyers.
How Bridging Loans Work
Bridging loans are typically secured against property and are therefore considered a form of secured lending. The loan is used to purchase a new property before an existing one has been sold or to purchase a property that is not suitable for a conventional mortgage (No Kitchen/Bathroom etc). The lender advances the funds, and the borrower is then required to repay the loan, plus interest, when the property is sold or when an alternative long-term funding solution is secured like a mortgage.
Loan to Value (LTV) Ratio
The loan to value (LTV) ratio is a key factor in determining the risk of a bridging loan. The LTV ratio is calculated by dividing the amount of the loan by the value of the property being used as security. In general, the lower the LTV ratio, the lower the risk to the lender and the more favourable the loan terms are likely to be.
Types of Bridging Loans
There are two main types of bridging loans: closed bridge loans and open bridge loans. Closed bridge loans are used when the borrower knows exactly when they will be able to repay the loan, such as when the existing property is due to be sold. Open bridge loans are used when the borrower is uncertain about when they will be able to repay the loan and may require an extension.
Advantages and Disadvantages of Bridging Loans
One of the main advantages of bridging loans is that they are designed to be flexible and can be arranged quickly. This is particularly useful for property developers and investors who need speed to secure a new property or complete a project. Another advantage is that bridging loans can be used for a variety of different purposes, such as property refurbishment, development and even auction purchase. They also require less documentation than a standard mortgage.
However, one of the main disadvantages of bridging loans is that they normally come with higher interest rates than standard mortgages. This is because they are considered a high risk form of lending. It is also important to be aware that if the sale of the existing property is delayed or if the borrower is unable to secure long-term financing (such as a mortgage_, they may be required to extend the loan, which can be costly. Additionally, the application process may be more difficult and have a more difficult criteria.
Bridging loans can be useful for property developers, investors, and homebuyers. However, they are considered high risk and typically come with higher interest rates than standard mortgages. Before taking out a bridging loan, it is important to fully understand the terms and conditions and to have a clear plan in place for repaying the loan. It is also important to seek advice as there are many different lenders and most do not offer the same type of protections as your residential mortgage.
Some forms of Buy to Let mortgages and Bridging Loans are not regulated by the Financial Conduct Authority.
The value of investments, and the income arising from them, can go down as well as up, and is not guaranteed, which means that you may not get back what you invested. Past performance is not a reliable indicator of future results.
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