Alternatives to a Bridging Loan
Alternatives To A Bridging Loan
Bridging loans can be used for several reasons, including " bridging the gap” for buying one property before selling another.
Other reasons for bridging loans include refurbishing an investment property or purchasing a property at auction. While there are alternatives to bridging finance, it’s important to understand how bridging finance works.
Regulated bridging loans are loans where the security offered is a property you live in or will live in. Bridging loans are restricted to a term of 12 months.
Unregulated bridging finance is available to corporate entities or properties you will not live in, such as buy-to-let properties. While most of the time, these loans are restricted to 12 months, many lenders will consider a term of 18 - 24 months.
There are three ways in which interest is charged on a bridging loan:
Rolled up - the interest payments are added to the loan each month and are repaid when the bridging finance is cleared.
Retained - you borrow the interest upfront for, say, 12 months, and once the loan is repaid, any unused interest is returned to you.
Monthly interest - this works like an interest-only mortgage in that you only pay interest each month.
One critical factor in bridging finance is how you will settle the loan, referred to as the “exit”. Any lender will want to see that you have a clear “exit” in place. If you could not repay the loan in the agreed period, the bridging lender would be within their rights to take possession of the property to recoup the funds.
Second Charge Mortgage
A second charge mortgage could be used as an alternative to bridging finance in certain situations.
The benefit of second charge mortgages is that the interest rates are generally less than bridging finance interest rates, and the loan term could be up to 30 years or more.
If you wanted to refurbish your home, you could take out a second charge mortgage, often referred to as a second mortgage or homeowner loan, and carry out the works at your own pace without worrying that the bridging finance needs repaying in 12 months.
The term with second charge mortgages is generally between 3 and 30 years. With a capital and interest loan, the shorter the term, the higher the repayment; the longer the term, the lower the repayment. Unlike bridging loans, you must make monthly repayments on the loan.
The term can be much longer with a second charge mortgage, meaning that if you keep the loan for the full term, you would have repaid a significant amount of interest.
A potential concern with a 12-month bridging loan is that you may feel pressured to repay the loan if you find it difficult to exit the bridging finance. Maybe you are finding it difficult to sell a property you intended to repay the bridging finance with.
With a second charge mortgage, the loan is over a longer period, meaning there is not as much pressure to exit the loan.
As with most finance, your credit score or credit rating impacts the interest rate you will pay. Any bad credit registered against you is likely to result in a higher interest rate being offered than if you had a perfect credit history.
If you have a poor credit score, it might be worth delaying applying for a loan until your credit score improves and you can get a loan at a more attractive rate.
One point to consider with secured loans is that you may have to approach your existing lender for permission to take out a second-charge mortgage. Your current mortgage lender typically takes 14 days to respond to the request.
Whether you plan to consolidate your finances or make home improvements to your property, it would be wise to seek the services of a professional mortgage broker. They can look at the various financing options and let you know if it's a good idea and what the best mortgage deals are available to you.
The equity in your property and other factors will determine the monthly payment.
You should remember that second-charge mortgages are secured against property, meaning you could lose your home if you can’t meet the mortgage repayments.
Equity release allows you to release a tax-free cash amount based on your age and the value of your home. The youngest homeowner has to be a minimum of 55 years old. The older you are, the more money you can potentially release.
While equity release is an alternative way of raising finance, you must be aware of various points.
The purpose of a loan for equity release would differ from that of someone taking out a bridging loan. Common purposes for the released equity would be to help a family member purchase their own home, make essential improvements to your home, or have the holiday of a lifetime.
You need to be aware that there can be high early repayment charges to pay if you are to clear the loan before the end of the term. Please take advice on this point.
While you are only usually paying interest over 12 months with a bridging loan, interest with equity release is charged daily, meaning the amount you owe increases quickly. You will repay the loan when you pass away or move out of your home into long-term care.
Personal or unsecured loans are generally available for people looking to raise smaller amounts, typically £3,000 - £15,000.
With personal loans, you must have a high credit score and not miss any credit card, loan, or mortgage repayments. Any missed payments are likely to result in the application being declined or you being offered a smaller amount at a higher interest rate.
The benefit of an unsecured loan is that you are not offering your property as collateral, meaning that if you could not keep to the agreement, you wouldn’t lose your home.
One significant benefit of an unsecured loan is that it can be arranged quickly, and in some instances, you can receive the loan funds the same day you apply. If a lender agrees to your application, the funds are transferred into your bank account.
For more information about exploring alternatives to bridging finance, contact our expert team today.