When you take out a bridging loan, the lender will place a ‘charge’ on your property. This means that if you fail to repay the loan, they’ll take their repayment from the sale of the property.
In the absence of existing loans secured on the property, such as owning it outright, the bridging loan in question would be classified as a 'first charge.' In the event of non-repayment leading to the sale of your home to settle the debt, the bridging loan lender would have the priority to receive their repayment before any other claims.
If you have existing loans secured against your property, such as a mortgage, a bridging loan in this scenario would be classified as a 'second charge.' In the event of non-repayment leading to the sale of your home to settle the debt, the bridging loan lender would receive their repayment after the mortgage provider has received theirs.
Second charge loans typically come with higher costs compared to first charge loans, primarily due to the increased risk for the second charge lender in case you are unable to meet repayment obligations. Additionally, obtaining a second charge loan necessitates the approval of the first charge lender, typically your mortgage provider.
Due to their brief duration, bridging loans often incur higher costs compared to other loan types. Monthly charges, as opposed to annual percentage rates (APR), are typical in this scenario and can vary between 0.4% and 2%.
The monthly billing approach amplifies the significance of even slight differences in interest rates, significantly impacting the overall loan expense. To illustrate, a 1% monthly interest rate corresponds to a 12.7% APR when factoring in compound interest. Similarly, a 2% monthly interest rate translates to a 26.8% APR.
It’s worth noting that not all companies apply monthly interest charges; some may opt for deferred or rolled-up payments, where interest payments are postponed until the conclusion of the agreement.
Usually around 1-2% of the total loan amount
Companies tend to charge a set amount to cover their legal costs
The cost of sending a surveyor to value your property.
The cost of paying your loan early. Not all companies charge an exit fee, but those who do charge around 1% of the total loan amount
This is the cost of the paperwork at the end of your loan period. The amount will differ from company to company
Some lenders may have other fees too, so don’t forget to take these into account when you’re choosing a loan.
A bridging loan is designed specifically for when you need a short-term loan, but it isn’t the only option available. Here are a few others to consider
Calculate the precise amount you require and determine the duration for which you need it before proceeding. Bridging loans come with high costs, so it's crucial to ensure that you can repay the loan within a relatively brief timeframe.
No matter which lender you opt for, be prepared to provide information about your situation. Anticipate questions such as: What is the current value of the property? Do you currently have a mortgage, and if yes, what is the outstanding amount? What is the equity in the property? What is your monthly income and expenditure? Have all these answers ready when engaging with a lender.
It's crucial to avoid hastily choosing the first loan you come across, given the multitude of options available. Consider utilizing the services of bridging loan brokers who can thoroughly research the market on your behalf. These brokers often have access to exclusive rates and deals, although it's important to note that they typically charge a fee for their services.
Make sure to thoroughly review the included fees before committing to any agreement. Additionally, consider applying for loans that align with your likelihood of approval. While Experian doesn't assess bridging loans, we do compare personal, secured, and guarantor loans. Utilize our service to check your eligibility rating when comparing loans. It's important to note that we act as a credit broker, not a lender†. Our role is to assist you in discovering deals, but we don't extend credit or make approval decisions.
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