Bridge loans are a type of financing that is designed to cover gaps when you're awaiting funds from a sale before a purchase. These secured loans are frequently used for real estate purchases. These loans make it possible to purchase a property before the sale of a different property is completed. In order to obtain one of these loans, it's necessary to have a valuable asset, like land or a property.
What Can Bridging Financing Be Used For?
There are a number of reasons people choose to use bridge loans, such as:
- Property purchases
- Developing property
- Investing in a buy-to-let property
- Business opportunities
- Covering tax bills
- Divorce settlements
It's also common to see these loans utilized by property developers that are buying property at an auction. Auctions require investors to make purchases with minimal notice, and that typically requires a deposit.
Using Bridge Loans for Property Development
It's common to see both property developers and landlords use this type of financing to invest in properties that they intend to sell right away. Rapid Bridging loans help make the process faster by offering faster timescales.
Residential Bridging Finance
This type of financing is frequently used when purchasing residential properties.
The Different Kinds of Bridge Loans
Most bridge financing follows one of two kinds of financing.
There are open bridge loans, which have no predetermined end date. You won't be expected to pay back your loan until after you have access to your funds.
Closed bridge loans, on the other hand, have a pre-determined end date. Typically, the due date for repayment is determined by when you know you'll have funds available. This financing is usually short term and lasts for just a few months or even a few weeks.
Because open bridge financing offers more flexibility, it tends to be more closely than closed bridge financing. No matter which type of loan you choose, you'll need to know how your loan will be repaid.
Selecting the Best Financing for You
There are a number of factors that need to be taken into consideration when looking at your financing options, such as:
- The amount you intend to borrow. The amount lenders offer borrowers can be anywhere from £5,000 to more than £10 million.
- The value of your assets. This will determine your bridge financing rates as well as the total amount you'll be permitted to borrow.
- The length of the loan. Some bridge loans last for as little as a month, but financing can continue for years.
If your property has a mortgage. This is another factor that can determine how much you'll be permitted to borrow via bridge financing. This will also influence whether first or second charge financing is available to you.
The Differences Between First and Second Charge Loans
A first charge loan is when a loan is the only type of secured financing that applies to a property. In most cases, mortgages are classified as first charge loans. However, if you don't have a mortgage, and if aren't any outstanding loans against your property, your bridge financing could be a first charge loan.
When you already have a mortgage or loan against your property, you'll need a second charge loan. In most cases, a second charge lender will need to obtain permission from a first charge lender prior to offering financing.
However, there is not a limit on the number of charges you can list against a property.