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A bridging loan might be the best solution for you if you require funds within a short period. This financing option can help you proceed with a new business opportunity while waiting for financial stability from a previous one. For example, like purchasing another property when you are yet to find a buyer for your present one. This guide will talk about bridge loans and why certain individuals should utilize them.
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Types of Bridging Loans
The most prominent types of bridging loans are open and closed.
Closed Bridging Loans
Closed bridging loans demand borrowers to pay based on their loan terms. These loans’ repayment dates are fixed and agreed upon. You will likely qualify for a closed bridging loan while you are awaiting your property to sell after swapping contracts.
Open Bridging Loans
Although these loans have no exact repayment date, your lender will expect you to pay them back within 12 months. Also, your lender will demand some proof of a practical repayment strategy, like a mortgage taking out or selling equity from your property.
In addition, you will likely have to offer proof of the property you are buying and how much you wish to pay. Lastly, you may also need to prove that you are actively seeking buyers for your present property.
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First and Second-Charge Bridging Loans
A complete property assessment will be carried out on your property, which will likely receive a charge. This charge is an agreement that specifies which lenders will receive their money first if you can’t repay. If you default with payment, your property will become collateral for a first and second charge bridging loan. If your property has a mortgage, your bridging loan becomes a second-charge loan.
Consequently, you will repay your mortgage before the loan if you miss some payments and have to sell your property to repay. However, if the property was yours or you were paying your mortgage completely with residential bridging finance, you will get a first charge bridging loan. Therefore, you will repay the bridge loan before any other debt.
Bridging Loan Expenses
These short-term loans are typically priced per month instead of yearly. Nevertheless, they are quite expensive, with monthly costs of up to 1.5%. In addition, they have a 6.1% to 19.6% APR, making them more expensive than a lot of mortgages. Set-up fees totaling about 2% of the amount you want to take out are also worth considering. So, it is best to go for these loans for the short-term only.
Bridging Loan Borrowing
You can typically borrow extra if you acquire a first-charge loan than a second charge one.
A let-to-buy mortgage is worth considering if you want to move without putting your property up for sale. You can achieve this if you remortgage your current property and buy a new one with the equity you free up.
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