What is a bridging loan? Your questions answered
Published: 11/09/2017
What is a bridging loan? Bridging loans are a short-term funding option. They are used to 'bridge' a gap between a debt coming due. and we're talking primarily about property transactions, here - and the main line of credit becoming available. Or they can simply act as a short-term loan in pressing circumstances.
Why is the interest rate on a bridging loan higher than a standard mortgage?
The interest rate on short term loans is generally higher because bridging lenders don’t benefit from receiving interest for long-term use of its money. The bridging lender is also offering a bespoke service and has to operate at speeds and levels of service which the longer term lenders cannot match. As such, interest rates are generally higher.How do I pay the interest due on my loan?
The main methods are:
• Paying monthly
• Retained interest: Where you borrow the interest payments due on the loan in addition to the loan amount you require. The extra amount is held by the lender (retained) and used to meet your monthly payments. You may be required to pay interest on the amount of interest payments retained
• Rolled up interest: The interest due each month is added to the loan balance. There are also various combinations of these approaches available in the market.
When do I have to repay the loan?
The loan will generally need to be repaid by a set date (‘the term’, ‘redemption’). Loans are usually repaid either by the sale of the property the loan is secured against or refinancing the loan with another lender. It is your responsibility to make sure you can repay the loan on or before the end of the term. Failure to do so can result in action being taken against you, further costs and fees being added to your loan and, as a last resort, repossession of the property.What happens if I am not able to repay my loan at the agreed time?
Sometimes things do not go according to plan and you may find yourself in a position of not being able to repay your loan at the agreed time. The important thing is to contact your mortgage lender as soon as possible to discuss your position.
Lenders will generally look to reach sensible arrangements with you and extend your loan term unless there are specific reasons why they cannot extend on your particular circumstances.
You should be aware that there may be additional costs and charges incurred if you do not repay on time. Many Bridging lenders charge fees for extending the term or for failure to repay on time.
It is therefore possible that the lender may also increase the interest rate when this occurs.
What if I already have a mortgage on my property?
It is possible to have more than one mortgage on a property. The later, second mortgage is often referred to as second charge or secured loan lending.
The charge is still a mortgage and should not be treated differently.
A charge will be referred to as a first charge (your first mortgage), second charge (your additional mortgage), third charge (a third mortgage) etc.
The number of the charge i.e. first, second etc. generally determines the order in which the lenders have the right to any money from the sale of the property.
There may be circumstances where this is changed due to deeds of postponement where one lender agrees to postpone the priority of their charge in favour of a ‘later’ charge by another lender. This does not change the fact that you will still owe the lender the money and they can still seek repossession or hold you personally accountable for any shortfall if the property is sold for less than you owe.
Some lenders restrict the right of a borrower to have a further mortgage and so it may not be possible to obtain a second or third charge mortgage even where there is sufficient equity in the property without your first mortgagee’s consent.
Can I change my mind and cancel the loan?
You have the right to cancel your loan application up until the time we request the funds from the lenders.
However if we have already given an undertaking to meet the lender’s solicitor’s fees, these will still be payable whether or not completion takes place.
Some lenders do include facility fees which are payable whether or not you proceed with finance. Check the terms of your facility very carefully before signing and returning it as at this stage you are committed.
Cancelling before this may mean that you are liable for fees that have not yet been paid such as solicitor’s fees and any other fees you have agreed to.
Content correct at time of publication