How Long Can You Have A Bridging Loan?
Bridging loans and other forms of development finance are used by many property investors and even individual home buyers as an alternative to a mortgage when buying a residential property. Although they can be used in place of a mortgage, they are not the same thing. Bridging loans are offered for a far shorter length of time – so how long can you have a bridging loan?
How long is a bridging loan?
A bridging loan typically lasts 12 months or less. Most bridging loans are repaid in full within six to nine months. This typically happens when contracts are exchanged or when a long-term mortgage is secured.
The exact length of your bridging loan will depend on its type.
There are two types of bridging loan: an open loan and a closed loan. A closed loan has a defined exit date on or before which the loan will be repaid in full. This loan is less risky and will usually cost less. An open loan, on the other hand, does not have a defined end date. The borrower will only be able to estimate as to when they can pay back the loan. These are naturally riskier and come with higher costs.
The implications of a short-term loan
Whether you are using a bridging loan for property development or to fund a purchase, it is important to be aware of the implications of the short length of the loan.
Your property is used as security
Because bridging loans are short, lenders will not normally be interested in your income or even your credit history when it comes to finalising the loan. They don’t have to worry about you being able to pay back the loan over thirty years. Instead, they take property as security. Just because your property is secured doesn’t mean that the lender wants to take it, however. That’s why you will need to be able to show a suitable and achievable exit strategy before you can complete on the loan.
Interest rates are higher
Because bridging loans are much shorter than mortgages, the interest rate is typically higher. Rather than paying 3% a year, some bridging lenders will charge 8% a year in interest payments. The important thing to note, however, is that the interest rates on bridging loans are paid monthly and not annually. So even though interest rates are higher, they are paid for a much shorter period of time. This is why it is important to calculate the total cost of a loan, rather than simply look at the interest rate.
There are typically more fees
Again, because bridging lenders are more flexible when it comes to the people they lend to and because they don’t have as long to collect interest, bridging loans typically come with more fees than other types of loans. These can include an arrangement fee, an exit fee, legal fees and interest charges.
If bridging loans are so short, when do people use them?
Bridging loans are typically used by property developers who do not want to borrow for years and years. In most cases, they only need a quick injection of funds to bridge the gap until a house is sold or to fund renovations. Both situations only take a few months and, as a result, a short-term bridging loan makes for a great solution.
But that’s not all they are used for. Many people who have poor credit or who need quick access to cash in order to secure a great deal will leverage a bridging loan with a view to securing a standard mortgage with longer terms at a later date. So, once the bridging loan has been secure and you have purchased a property, you have several months to get a mortgage in place. Once that has been secured, you can then pay back the bridging loan in full.
Despite the short-term nature of bridging loans, there are still risks to consider. Make sure that you find an authorised and regulated lender that you can trust.
If you are considering bridging finance as a short-term solution, complete the form below to find out more about how we can help.
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