Bridging Loan To Buy A House - Example Of How It Works

01-March-2018
01-March-2018 17:55
in General
by Admin

Buying a house is not always straightforward and in today's competitive market place you need readily available finance to act quickly to ensure that you do not lose your desired property to another buyer.

If you have found a house that you want to buy and need to move quickly then you might want to consider your bridging loan options.

Buying A House With A Bridging Loan

A bridging loan is a type of loan that is specifically designed for short-term usage. Bridging loans can provide a substantial amount of finance within a small space of time. They can be used to temporarily 'bridge' the gap when there is a short fall in funding.

When time is of the essence, bridging loans can provide a fast financial solution to allow you to act quickly and purchase your desired home.

Bridging loans can be secured against commercial and residential property, building plots or even land without planning permission.

When are bridging loans used

Bridging loans are adaptable and can be used in a variety of situations. You could use a bridging loan for:

  • Purchasing a new property before your existing home has sold: this could be when downsizing, upsizing, moving abroad or moving closer to a family member.
  • Breaking a mortgage chain: this could be if you are stuck in a mortgage chain and you want to complete the purchase on your new property.
  • Landlords who need to buy an investment property quickly: this could be when you need to act quickly to ensure the property you want is not snapped up by another landlord
  • Buying property at auction: this could be when you have a deadline to complete the purchase, often a purchase of an auction property must be completed within 28 days.
  • Cash flow restrictions: this could be used for personal and business purposes when cash is tight.

Bridging Loan To Purchase Family Home In Surrey

Bridging loan features

Typically, the majority of individuals looking for finance will approach a traditional lender such as a high street bank to access the funding they need to buy a house.

However, bridging loans have a number of features that make them potentially a better option than finance from a traditional lender.

Interest payments...

Bridging loans come with the option to 'roll-up' interest to pay at the end of the term of finance. This could be advantageous for buying a house because it enables you to avoid monthly interest payments and use the loan entirely for the purchase of your new property. If you choose to 'roll-up' the interest on your loan, you will have to pay the entirety of the loan back at the end of the term of finance.

The speed and convenience of a bridging loan makes them an attractive option for buying a house. Unlike traditional lenders, who can take up to several months to process an application, bridging loan lenders are much quicker at providing finance.

We work with some lenders who are prepared to process an application and release funding within 7 working days, depending on your set of circumstances.

Loan to value...

Not only can bridging loans provide funding quickly, but you can secure a substantial amount of finance through a bridging loan. The majority of lenders will lend up to 75% loan to value (LTV).

We work with some lenders that are willing to grant bridging loans up to 80% LTV or higher, depending on the set of circumstances and the assets used as security for the loan.

Typically, the most effective way to arrange a bridging loan is to secure the loan to both the new and existing properties. One property can be used as security on a bridging loan; however, it should be noted that the interest on a bridging loan with just one property as security will be higher.

Exit plan...

In order to access a bridging loan you will need a clear exit plan in place. An exit plan is the strategy in which you intend to use to repay the loan at the end of the term of finance. An example of an exit plan is where you sell your existing house and use the proceeds of the sale to repay the loan. The requirement of a clear exit plan provides peace of mind that the loan can be repaid at the end of the term. Another exit strategy maybe where you use a mortgage to repay the bridging loan.

No early repayment fees...

Traditional lenders will often not allow you to repay a loan in full before the agreed deadline. If you do repay your loan before the agreed deadline, traditional lenders will penalise you with an early repayment charge, which could be thousands of pounds.

Bridging loans are designed for short-term usage, which means that they usually come with terms of finance between 3 and 36 months. In addition to the short terms of finance, bridging loan lenders also will not charge early repayment fees.

Also, it may be interesting to note that most lenders only charge interest on the actual duration of the loan. So if you take out a bridging loan for 12 months but repay it entirely within 6 months, then you will only have to pay 6 months' worth of interest.

Unmortgageable properties...

On the whole, bridging loan lenders are more prepared to provide finance for any property. Traditional lenders will not grant mortgages or loans for every property. There are a number of properties that traditional lenders deem unmortgageable properties, and will refuse to provide the finance for them.

Traditional lenders will deem the following unmortgageable properties:

  • Valued under £50,000
  • With structural issues
  • Without a functioning bathroom or kitchen
  • That are derelict

If you require finance for an unmortgageable building, then you could explore your bridging loan options. Bridging loan lenders are not concerned with the state of the building, and often are happy to provide finance for properties that traditional lenders will not.

The Bridging Loan Process

The bridging loan lending process can be swift and efficient. A typical bridging loan application will play out as follows:

1) Initial call: This is where our brokers find out exactly what you need. This will usually require you to provide details of the loan size you want and the asset you intend to use as security

2) Indicative terms: Documentation will be sent to you providing a breakdown of our terms and conditions, along with a quote for the costs you will incur.

3) Lender search: Our brokers scour the market place to find the lender that will accommodate your financial needs.

4) Decision In Principle: Lenders provide a document to show they are happy to provide the loan size based on the information they have.

5) Client confirmation: Upon receipt of the Decision In Principle, you send notification that you want to proceed with the loan application.

6) Valuation: Our brokers instruct a professional surveyor to value your property, which is sent to the lender.

7) Lender confirmation: The lender will send the surveyor's report to their credit community team for confirmation that the loan is an appropriate size based your property's value.

8) Offer: The agreed loan amount will be sent to you.

9) Solicitors instructed: Solicitors will send all documentation of offer to you to sign.

10) Funds released: Once you have signed and returned the documentation, your funds will be released.

The time is takes to complete an application and secure the finance will vary from lender to lender, and depends on your set of circumstances.

A Bridging Loan Example

A lot of our clients use bridging loans when they want to purchase a property when their existing home has not sold.

Our clients, a retired couple wanted to downsize and move house, so that they could live closer to their family in Wales.

They put their residential property on the market and went in search of their next home. They found an ideal house in Newport which was in within suitable distance of their family.

Unfortunately, the couple were unable to raise funds through traditional high street lenders.

Their existing home had not yet been sold and they needed some additional finance to secure their perfect home near their family.

Current property valuation

 £300,000    

Outstanding borrowing on current property

 £0

New property valuation

 £300,000

New loan required

 £260,000

 A bridging loan was secured against both properties which enabled the couple to complete the purchase of their new home, without having to wait for the sale of their existing property.

Net Loan amount required

 £260,000     

Arrangement fee @ 2%

 £5,200

Interest generated per month @ 0.59%     

 £1,534

 Our clients' sold their existing home after 6 months and they were able to pay off the bridging loan.

Sale price

 £300,000       

Net bridging loan to be repaid                  

 £260,000

Arrangement fee @ 2%

 £5,200

6 months interest @ 0.59%

 £9,204

Total to repay

 £274,404

Balance to client

 £25,596

Once our clients repaid the bridging loan in full the charge was removed from both properties. This enabled our clients to purchase their desired home before any other buyer. 

Bridging Loan Case Studies

Clifton Private Finance

If you want to buy a house and you need finance quickly, then you could use a bridging loan.

We have strong relationships with lenders offering bridging finance to cater for a variety of circumstances.

Through our connections with private banks, specialist lenders, family offices and wealth managers, we can identify and secure the best financial solution for you.

To investigate your bridging loan options, call our team on 0203 900 4322 or use our callback form below