Bridging loan is a short term financial aid which is very helpful during the state of financial emergency. At times, you may need money temporarily so that can buy a property but due to no access to enough money; you aren’t able to do that. This short term property finance differs from a standard bank loan. The loan is usually given for a time period of 1 to 18 months.
Bridging loan is a method of raising funds quickly. When you have to apply for a bridging loan, there are several factors to keep in mind. Below mentioned are some of the major factors one should take into consideration while applying for bridging loan:
- Make sure that you understand how the loan works and all the related fees
While you plan to apply for bridging loan (majorly for the first-timers), you should first understand the way this loan works. Also make sure that you are well aware of the costs included.
- Make sure that you know how the loan repayment works
You should have a clear understanding of how you are going to make the payment against the loan. Generally, there are three types of methods.
- By property sale
- Through refinance to a longer-term debt
- Through the money which is due but you have not got
You should know if the repayment method is viable or not. You should know how you are going to pay the loan at the end of the term.
- Make sure that you choose the right solicitor who will help you
One very important decision that you have to make while planning to apply for bridging loan is selecting the right solicitor. The solicitor will ensure that the loan is approved within the time without any trouble. The solicitor should be an expert and experienced in the matter of bridging loans.
- Make sure to calculate the total cost
When you have to take a bridging loan, make sure that you compare it from different loan providers. Not just the rate of interest but total loan cost should be considered. Usually, the lowest rate of interest is preferred but large exit fees may be charged by the lenders. Also calculate all the hidden costs, management funds etc.
- Make sure that you have a secured exit plan
Since bridging loan is only given for short term duration, you should have a secure exit plan. Generally, the bridging loan comes with a higher rate of interest per month. So, you shouldn’t borrow for more than required. You may be charged renewal fees.
- Make sure that you understand the interest rate against the loan
As you know, bridging loans can have a higher interest rate as compared to traditional loans. You can opt for rolled-up payment for the interest against the loan. This means you don’t have to pay the amount every month, instead, you are required to make payment through lump sum at the end of a term agreement.
- Is there any other option than a Bridging Loan?
Bridging loan is a fast and easy way to get money. However, if you don’t know about the exit strategy, there are other alternatives as well. In case of buying an investment property, the mortgage can be arranged in a couple of months in some situations.
The above mentioned points are very important to consider while taking out a bridging loan. If you have to sell a property, you should make sure that loan terms provide you with sufficient time so that you can find a buyer and complete the sale. If you are asked to sell the property instantly, you may not get a good amount over the sale.
You should understand that bridging loans are meant to be used for short term aid only and if you end up using them for longer-term, they are going to be way too expensive for you since the rate of interest per month is higher here as compared to other options of longer-term loans. Also, you may have to pay for the penalties including several additional charges.
You need to inform the lender about the requirement of taking the bridging loan. Moreover, the lender will ask for security against the loan such as property, land, flat, house etc. so that the security can be used for securing the loan. You may have to face situations where you may be required to put two properties for securing a bridging loan. The lenders will also need to know your exit plan.