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What is a Bridging Loan?

Bridging loans are short-term property secured loans which are mainly used for property transactions. They are designed to cover a temporary shortage of credit, hence the term 'bridging'. In general, bridging loans are only taken out for a few months. In a situation where a property buyer needs to pay a down payment on a new mortgage before they have sold their existing home, a bridging mortgage could be suitable. Despite the fact that most bridging loans of this type are subject to the same regulation as mainstream mortgages, interest rates on bridging finance products tend to be higher than on traditional mortgages, and will be subject to arrangement fees.

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Applying for a Bridging Loan

Moving home can be a complicated (and not to mention stressful) process, made even more so when all the important dates don’t match up. If you have get the money together to take out a mortgage so you can move into your new place before you’ve got the money from selling your current home, then a bridging loan can help. Here’s how to get one:

1. Fill in the form

First, we'll need a few basic details about you and about the amount you wish to borrow. This step is important as it means we can make sure that we’re only finding you loans appropriate to your situation that you’re likely to get accepted for.

2. Wait for a broker to get in touch

Once you’ve sent us some information, it gets passed on to our expert panel of brokers, who will then get in touch with you to discuss your options.

3. Start borrowing!

Now comes the easiest part - take out the loan you've selected, get the keys to your house, and move in!

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What is Bridging Finance

Bridging finance is exactly the same as a bridging loan, there is no difference between the two financial products although the term bridging loans is far more commonly used than bridging finance.

What is a Bridging Mortgage

Bridging mortgages are exactly the same as a bridging loans and bridging finance there is no difference between the three financial products. In many ways all three products are actually short term mortgages, either first or second charge. Another term sometimes used is bridging funding.

Bridging Loans are a Short Term Option

Bridging loans can be much more expensive than mainstream mortgages as they are a short-term financing option, designed to assist borrowers who must have a clear exit strategy. The costs can range from 0.44%-1.5% per month, which could add up to anything between 5% & 18% per year, far more than most mortgages. So it pays to do a bridging loan comparison, particularly as rates can vary so much. You can also use bridging loan calculators to determine what your monthly payments would be based on the amount you wish to borrow.

As well as having higher interest rates, on bridging loans also very often have arrangement fees and you would have to pay both the lenders’ and your own legal costs.

In some cases, the interest rate may be of less importance than the cost of the fees. Paying a higher interest rate in order to pay lower fees could be a smart decision in the long run. In general, the bridging companies’ interest rate will depend on the 'loan-to-value', i.e. the amount you are borrowing as a proportion of the property's value, so it pays to compare as many bridging lenders as possible before you make a decision and also make us of a Bridging loans calculator.

What are bridging loans used for?

Bridging loans are typically used for house purchases. They are designed to assist home movers who wish to purchase a new home prior to having sold their existing home. When equity is tied up in an existing mortgage, bridging finance may be appropriate to fund a new property purchase.

They can be especially useful for property developers, landlords and people who are purchasing property at auction. Home-movers may wish to use a bridging loan to cover a break in a property chain, so that they can purchase a new property while waiting for a new mortgage. However, it is important to remember that taking out a bridging loan does not guarantee that you will obtain a mortgage in the future.

Types of Bridging Finance

There are two main types of bridging loans, open and closed bridge. A closed bridge is available to borrowers who have exchanged contracts for the sale of their current property. An open bridge is for borrowers who have found their ideal home but have not yet put their current property on the market. Due to their nature, closed bridge loans are more flexible and affordable than open bridge loans.

The Importance of an Exit Strategy

As bridging mortgages are an expensive way of covering a temporary shortage of credit, bridging loans should only be taken out by borrowers who have a clear exit strategy. If you are taking out a bridging loan to fund the purchase of a new property, it is advised that you already have a buyer in place for your existing property. A lack of this sort of exit strategy could result in serious financial issues if you cannot pay back a bridging loan.

Getting Accepted for a Bridging Loan

Since the financial crisis, obtaining credit from mainstream lenders in the form of conventional loans has become increasingly difficult. This, coupled with squeezed household budgets, has led to more and more people turning to short-term options like bridging finance.

Although increasing numbers of borrowers are using bridging loans as an alternative to traditional loans, this is not advisable, for a number of reasons. Firstly, bridging loans are far more expensive than traditional loans and come with fees which have the potential to mount up to £1000s over time. Secondly, they should only be taken out if there is a guaranteed line of credit which will be available in the near future. If not, the loan could prove extremely difficult to pay back. Finally, as bridging loans are often secured against the borrower's property, the consequences of not keeping up with payments could be grave. In short, bridging finance should only be used as a last resort, short-term option, for borrowers with a planned exit strategy. With all bridging lending you should ensure the product is right for your circumstances.

ME Expert Ltd is not authorised to provide advice and are introducing you to a regulated firm with whom we are not under a contractual obligation to conduct mortgage or general insurance mediation business with exclusively. You should ensure you provide any potential insurer with your full details and ensure that you are eligible to make a claim(s) in relation to the cover offered. ME Expert Ltd will receive a small payment for certain general insurance introductions which will not normally exceed £35.

MoneyExpert does not give advice on or recommend any particular insurance product or service or whether it is suitable for your personal circumstances. The information provided is to help you to make your own choice about how to proceed