What is a bridging loan?

If you are in a chain, where you are buying a home at the same time as selling a home, it's possible that you'll be put in the situation where you need to complete your purchase, but the funds from your buyer are not present. At this time, the vendor may threaten to accept someone else's offer unless you complete at a certain date. Without the proceeds from your home's sale you would have nowhere to turn. This is where bridging loans come in.

Bridging loans could be for a substantial sum, from £25000 to cover a shortfall to up to a few million pounds to fund the whole purchase. The amounts are borrowed for periods from a week to up to six months.

Product providers like these sorts of loans because they are meeting their customers' needs. But think about the word 'needs'. Customers get bridging loans at times when they really NEED them, and opportunistic product providers can take advantage of this.

Bridging loans are readily available, as the fact that they should be paid back very quickly makes them slightly less risky. But the people taking out a bridging loan are usually in a situation where they are desperate enough that they would accept some punitively expensive rates on the loan. Because of the short term of bridging loans, interest rates will be around 2.5% a month, and that multiplied by 12 is 30%, so you can see how high the rate actually is. In addition, you may also have to pay an administration or management fee of about 1.5% of the loan, depending on the loan's size.

A bridging loan is not too dissimilar to mortgages. The amount you borrow is secured on your home, except the advantage of mortgages is normally a low interest rate. Because of this, you need to be very careful, as if you fail to sell your existing home, you may have to also sell your new home in order to simply pay off your bridging loan. You could be left out of pocket from the legal costs from buying and selling your houses, plus the interest you'll have had to pay on the loan before you had to pay it back. Even having spent that money, you'll still be back where you originally started. Thus, you should view a bridging loan as solely a convenient, but very last resort.

Product providers will ask you to fill in an application form for a bridging loan, similar to a mortgage application. Because of your needs, product providers will try to give you a decision within 24 hours, and the money should be given to you within a week.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2008

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