Bridge Loans – How Do They Work?

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11 Aug 2010 --- Indian woman counting coins and writing on notepad --- Image by © JGI/Jamie Grill/Blend Images/Corbis

Bridging finance can help you purchase a new property while your present one is yet to sell. This article will explain what bridge loans are and why certain people consider them the best solution to their funding needs.

What Are The Types Of Bridging Loans?

Aside from specific loan types, the most common kinds of bridging loans are open and closed.

Closed Bridging Loans

A closed bridging loan is a short-term loan whose exit strategy is clear from the beginning. Your broker knows how you will repay your loan when the term ends. When you borrow a closed bridging loan, your debts must be repaid based on your loan term. You will likely get this type of funding if you are still awaiting the finalisation of your property sale despite exchanging contracts.

Open Bridging Loans

An open bridging loan is a short-term finance with no defined repayment date. However, you will generally have to repay your loan within one year despite the lack of a defined repayment date. Your broker will typically want evidence of a practical repayment strategy, like whether you can take out a mortgage or sell equity from a property. Additionally, they will want proof of the property you purchase and how much you plan to pay. Your broker may also want to see the steps you are taking to find a buyer for your present property if necessary.

First And Second-Charge Bridge Loans

An assessment of your property will be carried out, and there will be a charge placed on it when you borrow a bridging loan. This charge is a legal deal that specifies which brokers get paid back first if you cannot repay your loan. If you default on your loan, your property will be taken as collateral by a first and second charge bridging loan. Your bridging loan becomes a second charge loan if you have a property mortgage. Consequently, if you miss payments and have to sell your property to repay your debts, you can expect your mortgage to be paid before the loan. However, you will get a first charge bridging loan if the property was yours or you were repaying your mortgage completely with a residential bridging loan. This loan means that you will repay your bridging loan first if you miss some payments.

Borrowing With Bridge Loans

You can receive £25,000 – £25 million in cash from bridging finance brokers like Finbri. If you receive a first-charge loan, it is possible to borrow more than if you opted for a second charge loan.

Other Options

A let-to-buy mortgage is an excellent choice if you wish to relocate without selling your property. You can achieve this by remortgaging your current property and getting a new property with the equity you free up.