Understanding the Different Types of Bridging Loans: What to Choose?
A bridging loan is a short-term loan used when buying one property before the previous one is sold. The funds from selling the old property are used to pay off the loan.
Bridging loans are ideal for those who need to complete a property purchase quickly. There are several types of these loans to suit different needs. This blog will discuss the main types available.
Types of bridging loans
Below are the types stated.
- Open Bridging Loans
An open bridging loan has no fixed payoff date. You can repay at any time when your property sale completes.
Open loans allow flexibility if the property sale is delayed. There are usually no early repayment charges with open bridging loans. The lender charges a higher interest rate due to the uncertainty of repayment timing.
These loans can be riskier for lenders. Borrowers may take longer to sell their old property. Open bridging loans suit those whose property sale could face unpredictable delays.
- Closed Bridging Loans
Closed loans have a fixed maturity date. These must be repaid when the term ends, usually 6 or 12 months. Closed loans provide certainty for the lender. The borrowers must sell their property and repay by the maturity date.
If unable to do so, arrangement fees apply to extend the term. Closed loans have lower interest rates than open loans. The lender faces less risk as repayment is guaranteed by a specific date.
Closed loans suit borrowers who are confident they can sell within the term. It avoids extension fees. These loans are short-term property finances preferable when selling property with a predictable timeline.
- Commercial Bridging Loans
Commercial loans finance properties for business uses. This includes shops, offices, hotels, and industrial units. Besides, these loans have higher interest rates than residential loans.
Moreover, commercial properties can be more complicated to sell than residential. Loan-to-value ratios are around 60-70% for these types of loans.
Lower ratios reduce lender risk. Borrowers may need to find more deposit finance. The application process takes longer for these loans. Lenders undertake detailed due diligence on the property's business potential.
Commercial loans can help businesses in purchasing commercial property quickly. However, sufficient equity in the property is usually required.
- Residential Bridging Loans
Residential bridging loans are for buying property for personal residential use. This includes houses, flats, and apartments. Residential loans have lower interest rates than commercial loans.
Furthermore, residential properties carry less risk as they are easier to sell. Loan-to-value ratios are around 75% for residential loans. The lender's risk is lower. Thus, they permit higher lending against the property value.
The application process is quicker than commercial loans as less due diligence is needed. Residential loans provide fast finance to purchase a new home before selling your current one. This helps homeowners in moving up the property ladder smoothly.
- Property Development Bridging Loans
Property development bridging loans finance the purchase and construction costs to renovate a property. Funds can also be used for conversions to change a building's use.
Interest rates are higher for property development loans. Construction projects carry risks of delays and cost overruns. Loan-to-value ratios are 50-60% due to the higher risk
Property development loans have an 'open' structure. There is flexibility in repaying after selling the completed project. Strict criteria apply like using an approved builder.
These loans help investors to add value to a property quickly. However, sufficient existing equity is needed to access these loans.
- House Purchase Bridging Loans
A house purchase bridging loan finances buying a new home. This is while you complete the sale of your existing property. House purchase loans are a common type of residential bridging loan.
Interest rates are lower than commercial and development loans. Loan-to-value ratios are around 75% of the new property's value. The lender has good security against default.
House purchase bridging loans help homeowners in moving up the ladder faster, rather than waiting months between selling and buying. This allows for seizing opportunities in competitive property markets. House purchase loans suit those comfortably able to repay from their impending house sale.
- Self-Build Bridging Loans
Self-build bridging loans provide finance to construct your own custom-built home. Funds cover purchasing land and building costs. Self-build loans are considered higher risk than house purchase loans.
The end property value is uncertain before construction. Interest rates are slightly higher to offset this risk. The loan-to-value ratio is around 50-60% based on the land value only.
Repayment is often left 'open' until after selling your current home. These loans offer tailored homes to suit buyers' needs.
However, you will need substantial funds upfront for land and construction. Self-build loans are worthwhile for those with specialist house design requirements.
Conclusion
Bridging loans fill the gap between selling one property and buying another. They provide fast flexible finance for those needing to act quickly. Understanding the different types available is key. With numerous types of bridging loans available, intermediaries can help find the right product to match individual needs and situations.
Comments